The end of one tax year and the start of another is often a time to review your finances and make sure you’ve taken advantage of all the tax-efficient allowances you can. With Friday 5th April 2019 now looming, it’s the perfect time to review your financial performance over the last 12 months, plan for the year ahead and see where gains can still be made in 2018/19.
Get ready for the new tax year by considering these five financial tasks:
1. Use your ISA Allowance
Your annual ISA (Individual Savings Account) subscription resets every year and can’t be rolled over. So, if you don’t make the most of it before the new tax year, you will lose this year’s allowance. As an ISA allows you to save and invest tax-efficiently, making the most of this allowance should be one of your priorities if you have spare money left over.
The current ISA allowance is £20,000 annually. This can be placed in a single account or spread over multiple accounts. As a result, you can choose to hold a portion of your savings in cash and invest the remainder. Your annual subscription also includes the use of other ISA products, including the Lifetime ISA and Help to Buy ISA, which may impose further separate limits.
The end of tax year allowance also applies to Junior ISAs, though the annual limit is lower at £4,260. If you’re saving for your child or grandchild’s future, making the most of this allowance can boost savings.
2. Give gifts to your loved ones
If you’re worried about the possibility of your loved ones paying Inheritance Tax (IHT), gifting can provide a solution to reduce liability. However, the gifting rules may mean that IHT is still due on your estate.
IHT is paid on the value of your estate over £325,000, or £450,000 if you’re also taking advantage of the Residence Nil-Rate Band. Some gifts are classed as potentially exempt transfers (PETs) when given. This means that they may still be considered part of your estate for up to seven years after your death and, therefore, may be liable for IHT.
However, some gifts are immediately considered outside of your estate for IHT purposes. This includes up to £3,000 each tax year. If you’ve not already made use of this, it’s an opportunity to provide financial support to loved ones and decrease how much IHT they may have to pay in the future.
The annual exemption of £3,000 can be rolled over for one year, so, if you haven’t already, you can use the allowance from 2017/18 too.
3. Your dividends allowance
If you receive dividends outside of an ISA or are a company shareholder or director, there is a dividend allowance you can take advantage of. Up to £2,000 can be taken in dividends without incurring Income Tax. The allowance cannot be carried forward to next year.
The amount of tax paid on dividends above your allowance will depend on the Income Tax band you’re in. The tax rate is currently set at 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively.
Remember, the dividends allowance has decreased in the last year. It reduced from £5,000 at the start of the current tax year. As a result, your Income Tax liability may have increased if you haven’t adjusted your financial plan for this change.
If you receive dividends through a Stocks and Shares ISA, these are tax-free and aren’t part of your dividend allowance. Dividends that fall within your Personal Allowance, which is £11,850 for the current tax year, are also outside of your allowance.
4. Boost pension contributions
A pension is a tax-efficient way to save for retirement, as it will typically benefit from tax relief. Usually, you can contribute a maximum of £40,000 per year, including employer contributions, before it becomes subject to tax. If you’ve yet to reach this limit, it can be an effective way to build up your retirement provisions. Your annual pension allowance can be carried forward for up to three years if it’s unused. You will not be able to access your pension until you are least 55 years of age.
There are a few things to note here before topping up your pension though.
First, if you’ve already withdrawn a sum from your pension, your annual allowance will be lower at £4,000.
Second, you should be aware of the Lifetime Allowance. This is the total amount of pension benefit you can accumulate before tax is paid. The Lifetime Allowance is set at £1.03 million.
Finally, if you’re a high earner you may be affected by the Tapered Annual Allowance, reducing how much you can place in your pension each year. For every £2 income over £150,000, the annual allowance is reduced by £1, up to a maximum reduction of £30,000. So, if you have an income of £210,000 or more, your annual pension allowance will only be £10,000. Understanding the Tapered Annual Allowance and what it means for you can be complex, please contact us for help.
5. Capital Gains Tax
Capital Gains Tax (CGT) is the tax you pay on the profit you make from selling certain assets, including investments or a second property. Everyone has an annual allowance before CGT is applied (£11,700), which cannot be rolled over into the following year.
The profit you make from selling investments in a Stocks and Shares ISA is free of CGT and won’t count towards your allowance.
Whether you want to ensure you’re taking advantage of all opportunities or create a financial plan for the year ahead, please contact us. We’re here to help you get the most out of your finances, allowing you to be confident in your future.
Please note: The Financial Conduct Authority does not regulate Tax Planning. A pension is a long-term investment. The fund value may fluctuate and can go down. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.