End of year financial planning: 6 tips you can’t afford to miss

Financial News

Sufferers of FOMO; take note. There are six important things to do before the end of the tax year.

For those who are eager to add another acronym to their repertoire, FOMO is fairly new phenomenon, meaning ‘fear of missing out’. Often caused by seeing social media posts or articles online, it is an unshakeable anxiety that something important is happening elsewhere, and you’re about to miss out on all the action.

To ensure that you don’t lose out on important personal finance opportunities before the 5th of April (and to keep that pesky FOMO at bay), here are six ‘use it or lose it’ things to be aware of.

1. ISA Allowance

Whilst the interest rates are nothing to get too excited about, Cash ISAs remain a tax efficient home for your savings. For those comfortable with accepting a degree of risk to their capital, Stocks & Shares ISAs offer the potential to get higher returns, benefitting from the same handy tax wrapper.

Regardless of which ISA you opt for, the annual allowance (which is the maximum you can pay in one tax year) is currently a relatively generous £20,000 per person.

This allowance will remain the same for the 2018/19 tax year, with the option to use £4,000 of it to pay into a Lifetime ISA (LISA) if you are under the age of 40. Any unused allowance doesn’t carry over, so those who want to make the most of it should act before April 5th, when the tax year ends.

ISAs offer a tax efficient way to save, but it is also worth noting that everybody has a personal savings allowance (PSA) based on the amount of tax they pay:

  • Basic-rate taxpayers: £1,000
  • Higher-rate taxpayers: £500
  • Additional-rate taxpayers: £0

The PSA allows savers to receive an income from savings accounts and investments up to their limit, without being liable for Income Tax.

Whilst this may take the shine off ISAs somewhat, any interest above the PSA will be taxable, so a combination of the two is often the most effective way to avoid unnecessary taxation.

Thinking beyond yourself can also have its benefits. The annual allowance for Junior ISAs is set to increase to £4,260 (up from £4,128 in the 2017/18 tax year). As with regular ISAs, this represents another ‘use it or lose it’ opportunity that will vanish in April.

2. Inheritance Tax (IHT) gift exemption

Often called a ‘voluntary tax’, IHT can be reduced by giving away assets before you die. For large gifts, this comes with the condition that you must live for seven years after giving it. This doesn’t apply for smaller gifts, and each person has a gift exemption allowance of £3,000 that can be given away, tax-free.

Unused allowances can be carried forward to the next year, giving a married couple the potential to give away £12,000. The ability to carry forward only applies for one year, so for those who wish to reduce their estate over the course of many years, it is important to make the most of each year.

3. Pensions annual allowance

The annual pension contribution allowance used to be far more generous than it is now. Sitting at £215,000 in the 2006/07 tax year, it has decreased gradually to the current allowance of £40,000.

Whilst this allowance will stay at the same level for the 2018/19 tax year, the overall decrease over the course of the decade has made it more important than ever to make the most of each year.

Those with unused allowance left over can allocate the previous three tax years to the present, using a rule commonly known as ‘carry forward’. This rule is particularly useful to the self-employed, and those who experience an income fluctuation from one month (or even year) to the next.

The £40,000 annual allowance applies to most people. However, higher earning individuals with an income of over £150,000 will see a tapered rate gradually reduce their contribution allowance to a minimum of £10,000 for those earning £210,000 or more.

4. Dividend allowance

Business owners who pay themselves dividends can currently receive £5,000 without incurring tax. This allowance will reduce to £2,000 in the 2018/19 tax year, meaning those receiving the same level of dividends will pay more tax.

If you haven’t used your full allowance for the current tax year, taking a dividend early could ensure that no unnecessary tax is paid.

5. Capital Gains Tax exemption

Capital Gains Tax (CGT) is an often-overlooked area, but it can be expensive to do so. H M Revenue & Customs (HMRC) reported that it collected £3.9 billion from CGT in the 2013/14 tax year; almost £500 million more than it received from IHT (Source: Gov.UK).

The CGT exemption allowance for the current tax year is £11,300. This means that you can dispose of an asset (or in simpler terms, sell a personal possession that has increased in value) up to this amount without incurring tax.

CGT rates were reduced in the 2016 Budget, but currently stand at:

  • 10% for basic-rate taxpayers (with 18% for residential properties)
  • 20% for higher-rate taxpayers (with 28% for residential properties)

(Source: Gov.UK).

The allowance resets each tax year and doesn’t carry over. This means that the disposal of any assets that will incur CGT should be timed carefully to avoid paying unnecessary tax. These include:

  • Personal possessions worth £6,000 or more
  • Property that isn’t a primary residence
  • Non-ISA based shares or business assets

6. Marriage allowance

Announced in April 2015, marriage allowance allows a person to transfer £1,150 of their Personal Allowance to a husband, wife, or civil partner who earns more than them.

This could reduce their Income Tax by as much as £230 each tax year, and applies to anybody who fits the following criteria:

  • Those who are married or in a civil partnership
  • One partner has an income of less than £11,500
  • The other partner has an income of between £11,501 and £45,000 (or £43,000 if they live in Scotland)

(Source: Gov.UK)

The marriage allowance resets each tax year, making it an important thing to be aware of, and to claim.

Don’t miss out

Being late to the party is never fun. All the good cakes are gone, the best tunes have already been played, and you never know what fun you’ve missed out on.

Whilst there is significantly less cake in the opportunities listed above, you definitely won’t want to miss out on them. A new tax year is rapidly approaching, and waiting just a few days could be the difference between missing the boat, or being aboard with money in your pocket.

We’re here to help. For more information, contact Sarah or Bev on 0115 9338433.