Use it or lose it: The valuable tax breaks to take advantage of before 5 April
We are fast approaching the end of the tax year, which means it’s the perfect time to get your affairs in order and make the most of the tax breaks that are available. Here, Senior Adviser Jason Adams delves into the various allowances in more detail to help you gain a better understanding.
As the end of the financial year approaches, this is the time to make sure you have done everything you can to make the best use of tax-free allowances; small steps, perhaps, but ones that can help get you firmly on the path to financial security.
How much tax will you pay on your investments? Is your pension planning on track? How much of your wealth could pass on to your family free of Inheritance Tax? It’s all in your control.
Whether it’s planning your investments or your legacy, now is the time to act before the tax year-end deadline on 5 April. Here are five key areas to look at:
An ISA shelters your money from further liability to Income Tax or Capital Gains Tax, which can help to give your savings a significant boost over the long term. ISAs are flexible and simple to understand as well, which is why they have proved such a popular way to save and invest. It’s worth bearing in mind that if you had taken full advantage of the ISA scheme each year from their introduction in 1999, you could by now have invested nearly £230,000!1 You can also make contributions of up to £4,368 per child into Junior ISAs to help them get a head start in saving.
The key numbers:
- Your contribution limit: Individuals who are 18 or over can invest up to £20,000 in an ISA this tax year.
- Spouses and partners: Check they have maximised their ISA allowance to fully utilise the combined allowance of £40,000.
- Child’s allowance: A Junior ISA allowance of £4,368 this tax year is available for those who are under 18.
- Tax boost: Returns from an ISA are free of Income Tax and Capital Gains Tax.
- Use it or lose it: You cannot carry forward your allowance, so this year’s will be lost if it is not used.
A pension is a tax-efficient way of saving for your retirement and, thanks to greater choice and flexibility, it’s a more attractive option for retirement savers than ever before. Not only that – the tax incentives are hard to beat. Subject to certain limits, tax relief on pensions means your contributions are boosted by 25% on day one. Any growth is fee of Income Tax and Capital Gains Tax, which can also make a real difference to the size of your retirement fund in the future.
The key numbers:
- Your contribution limit: Most people get tax relief on pension contributions worth up to 100% of their earnings, capped at £40,000 each tax year. This is called the ‘annual allowance’.*
- Carry it forward: If you don’t use all your allowance in one year, you can ‘carry it forward’ for up to three years. The opportunity to carry forward your allowance from 2016/17 will be lost after 5 April 2020.
- Turning 75? You will no longer qualify for tax relief on pension contributions.
* For additional rate taxpayers with net income of £110,000 or more, a `tapered annual allowance’ applies, which reduces this limit.
- Business owners
If you own a business, depending on your earnings, consider taking dividend income instead of salary to avoid National Insurance contributions (NICs). The first £2,000 of dividend income is tax-free. You could also divert your company’s pre-tax profits into a personal pension to reduce your company’s liability to Corporation Tax, Income Tax (including on dividends) and NICs. Contributions will need to be paid before your company’s financial year-end in order for the business to qualify for the deduction in that accounting period. In many cases, that deadline will be 31 March 2020.
- Tax and estate planning
The end of the tax year is a timely reminder to get your house in order and make the best use of other tax breaks and allowances, helping you prevent your family from paying unnecessary Inheritance Tax. IHT receipts have soared to record levels: in the 2018/19 financial year, UK taxpayers paid HMRC £5.4 billion in IHT.2
One of the easiest, and potentially rewarding, ways to reduce a future IHT bill, is to give some of your wealth away during your lifetime. You can give away up to £3,000 each tax year IHT-free, and it is possible to utilise any unused gifting allowance from the previous tax year; by combining individual contributions, couples can potentially gift up to £12,000 by 5 April. That money could be invested on behalf of a child or grandchild, in a Junior ISA or child’s pension.
The key numbers:
- Your gifting allowance: You can give away up to £3,000 each tax year IHT-free.
- Carry it forward – you can make use of any unused gifting allowance from the previous tax year.
- Double up: Using this and last year’s allowance, a couple could potentially remove £12,000 from their joint estate before 5 April.
- Don’t delay: The contribution deadline for this tax year is 5 April 2020.
- Take advantage of your annual Capital Gains Tax (CGT) exemption
Every taxpayer currently receives a Capital Gains Tax (CGT) exemption of £12,000 in the tax year – so it makes sense to realise what tax gains you can take advantage of up to this limit before it’s lost after 5 April. It is expected that CGT will raise £9.1 billion3 this tax year, so it’s certainly worth looking for opportunities to place assets into wrappers, such as pensions and ISAs, to safeguard them from further tax.
Is your spouse using their allowance? If not, you can transfer your assets across, giving you the ability to raise your gains to £24,000 between you. This method is not subject to CGT, making it easier for you to complete.
In uncertain times, it’s easy to let external worries – such as Brexit, international tensions and the recent Coronavirus outbreak – cloud your judgement. However, the risk is that you delay the actions that can help you achieve financial security for yourself and your family – such as taking advantage of the valuable breaks offered each tax year.
You should think of managing your money as a lifelong strategy that can change and adapt as your personal circumstances change, ultimately giving you financial freedom.
If you have a question about receiving financial advice, or would like more information on getting the most out of the tax breaks before the tax year end, please contact me on 01444 244551 or via email at email@example.com.
1 HMRC, Individual Savings Account (ISA) statistics, April 2019
2 HMRC, National Statistics, December 2019
3 Office for Budget Responsibility, accessed 30 January 2020