Did you make a New Year’s resolution? Aside from dry January or getting back in the gym, perhaps you made some financial resolutions? If not, now is the perfect time to get some valuable planning in before tax year end. Don’t leave it to the last minute, there are several tax-efficient allowances to use and a little forethought could improve your long-term financial security. So, here are ten things to best prepare yourself before 5th April:
1. Set aside time to plan
Any good plan starts with consideration, and to fully consider your circumstances and aspirations, you need a little time. Reserve an evening, or a few hours in the week. It can be with or without a financial planner, but a little time invested could save you wasting some valuable tax benefits.
2. Maximise your pension
If you’re not yet enjoying the freedom of retirement, the maximum amount you can pay into your pension whilst receiving tax relief is 100% of your taxable salary, up to a maximum of £40,000 a year or £3,600 if you have no net relevant earnings. This is known as the Annual Allowance (AA).
You should also be aware of the Tapering of the AA for high earners, which is adjusted by £1 for every £2 for those earning over £110,000. The maximum reduction is £30,000, reducing the AA to £10,000.
In some circumstances, unused AA can be carried forward from the past three years, increasing the amount you can contribute this tax year. If you have the opportunity to use your AA in its entirety, you will be maximising your potential retirement income.
If you are over 55, have already begun making pension withdrawals, and would like to top-up your pension, you are still able to. The maximum you can now contribute is known as the Money Purchase Annual Allowance (MPAA) and drops to £4,000. This cannot be carried forward. Still, the MPAA receives the same tax benefits as pre-retirement and is an excellent way to continue saving in later life.
3. Use your ISA allowance
Tax-efficient Individual Savings Accounts (ISAs) can be invested in Stocks and Shares or Cash. The maximum you can pay in annually is £20,000 per person, which will remain the same in 2019/20. There are a few different types of ISA, but £20,000 is the maximum contribution permitted between them.
Importantly, unlike the pension Annual Allowance, your ISA allowance cannot be carried forward from one tax year to the next; you either use it or lose it. Unused ISA allowance should be utilised as a priority!
4. Save for your children
Your children also have tax-free savings available in the form of a Junior ISA (JISA). The maximum you can save is £4,260 a year. Available up until the age of 18, JISAs are free of Income Tax and Capital Gains Tax. Like ISAs, if you don’t use their allowance in full it will be gone in April.
Your child can take control of their JISA at age 16 but are unable to make any withdrawals until 18 when they become the formal owner. Interestingly, at age 16 your child will have two ISA allowances, both the JISA and ISA allowance of £20,000.
5. Make charitable donations
If you’ve donated to a worthy cause don’t forget Gift Aid is available to receive tax relief on your contribution. It’s not just for the charity; if you are a higher or additional rate taxpayer you are able to claim the difference between the basic rate received by the charity and the additional tax you have paid. You will need to claim for Gift Aid via self-assessment before the end of the tax year.
6. Give gifts
Inheritance Tax (IHT) of 40% is payable on estates over £450,000 for individuals or £900,000 for a married or civil partnership couple in 2018/19. These allowances are made up of the personal £325,000 Nil-Rate Band (NRB) and an additional £125,000 Residence Nil-Rate Band (RNRB). The total figures are rising to £475,000 and £950,000 respectively in 2019/20, as the RNRB is due to increase.
There are a number of ways to reduce or mitigate IHT, one of them is making gifts of up to £3,000, using the Annual Gift Exemption. These funds are immediately exempt from IHT if you die.
The exemption can be carried forward, but only for a year. So, if IHT is a concern and you’d like to gift some wealth to loved ones, now is your opportunity. If you’d like to discuss other ways to mitigate IHT, don’t hesitate to get in touch.
7. Take dividend income
Introduced in 2016, the Dividend Allowance means business owners and investors owning shares can receive dividends of up to £2,000 a year free of Income Tax. After that, the tax charged on dividends is 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers.
Like the Income Tax personal allowance of £11,850, this cannot be carried forward in any way, and will be lost at the end of the tax year. If you’re in a position to take dividend income and haven’t yet, now is the time.
8. Plan your revenue
Speaking of the personal allowance, this is due to increase next year. So is the higher rate threshold. Delaying taking some income from investments or remuneration if you are self-employed until next year could save you Income Tax. Rates are changing from;
- Personal allowance increasing from £11,850 to £12,500
- Higher rate threshold increasing from £46,350 to £50,000
9. Use your CGT allowance
You get an annual Capital Gains Tax (CGT) allowance, known as the Annual Exempt Amount (AEA). You only pay CGT if your overall gains for the tax year are above the AEA, which in 2018/19 is £11,700. Next year the AEA is rising to £12,000. If assets are jointly owned, such as a Buy to Let property, you can use both of your allowances. Depending on what assets you are planning to sell over time, keeping the AEA in mind could save you valuable CGT.
10. Seek advice
If this sounds like a lot to personally take on in the next few months, we are here to help. If you have any questions about using your tax-efficient allowances to help improve your financial security, don’t hesitate to pick up the phone or email.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
This information is based on our current understanding of HMRC guidance as of 2018/2019 tax years.