Beat the end of year Tax rush
Posted by siteadmin on Thursday 1st of March 2018.
In this guide Piers Mepsted explains:
- Why you shouldn’t leave tax planning until the end of the tax year.
- How acting now means you can maximise tax-planning opportunities – and minimise stress.
- The main tax-planning opportunities in the current tax year from pensions to property, inheritance tax to ISAs, dividends to capital gains tax.
As the end of the tax year gets closer there is a window of opportunity to make the most of valuable allowances, reliefs and exemptions that can help reduce your tax bill and make sure your finances stay tax efficient.
Some of these allowances will be lost if not used before the tax year end on April 5 - and the sooner you claim them the better. Every year, many people leave end of year tax planning until the last minute.
Leaving planning until the eleventh hour increases the risk that you will discover you have left it too late and missed out on the chance to improve your financial position. Acting well before the tax year end means you can be sure that you are maximising your opportunities and minimising your stress.
This guide aims to highlight the main tax-planning opportunities in the current 2017/18 tax year. However, while tax efficiency is an important part of financial planning, it is not the only part.
Your financial adviser can help you put the money you save in tax to work harder elsewhere.
The changing tax landscape
The UK’s tax system is constantly changing, which means that unless you remain up to date there is always the chance that you could lose out. Sometimes reforms are for the better, as witnessed with the substantial recent increase in the ISA allowance. Others can be for the worse, such as the series of cuts that has been inflicted on pension allowances. The important thing is to remain informed.
Building a tax-efficient retirement portfolio
Maximise your annual pension allowance
The annual allowance is the limit on the amount of pension contributions that can be made each year and qualify for tax relief. In the 2017/18 tax year, the standard rule is that you can contribute the lower of your annual earned income or £40,000.*
The annual allowance has changed significantly since it was introduced in 2006 at £215,000 and in recent years has been cut sharply. However, the tax breaks on pension savings remain pretty impressive.
The government adds income tax relief to your investment. Any growth over subsequent years will be free of income and capital gains tax.
The annual allowance isn’t necessarily lost at the end of the tax year, as you can ‘carry forward’ any unused allowance from the three previous years. However, as you can’t get tax relief on more than you earn, for most people, putting money aside each year is likely to be the best way to benefit from the available tax breaks.
Minimising tax on your other investments
Make the most of your increased ISA allowance
In our low interest rate environment, making sure that your savings and investments are not needlessly depleted by tax is more important than ever. Individual savings accounts (ISAs) are at the core of most tax-efficient portfolios, and in April 2017 there was a substantial increase in the annual ISA allowance. If you don’t use your annual ISA allowance before the end of the tax year you lose it forever.
In the current 2017/18 tax year, individuals can invest up to £20,000 (£40,000 for a couple) – a significant uplift on the £15,240 ISA allowance for 2016/17.
The tax benefits of ISAs remain the same. With a cash ISA, the interest is tax free. With stocks and shares and other ISAs (including the Lifetime ISA introduced in April 2017), there is no tax to pay on income or capital gains from your investments.
To encourage even wider use of ISAs, the government has introduced several changes in recent years that have potentially made the accounts even more attractive.
- You can transfer ISAs as often as you like, including previous years’ ISA savings. Money held in a cash ISA can be transferred into a stocks and shares ISA and vice versa. Be aware, though, that some providers restrict transfers in.
- If your ISA is flexible, you can take cash out then put it back in during the same tax year without reducing your annual ISA allowance. Not all ISA providers offer this flexibility, and strict rules must be followed. However, if you are interested in this facility your financial adviser will be able to help you establish if it is possible.
- April 2017 saw the introduction of the Lifetime ISA (LISA), which is aimed at helping younger adults to save for retirement or build up funds towards the purchase of a first home.
A LISA can be opened by anyone between the ages of 18 and 40 and while you can only put in £4,000 a year (which comes out of your full ISA allowance), the government boosts it by 25%, so that for every £4 saved the government adds £1. This means a maximum bonus of £1,000 on the annual £4,000 limit. Growth is tax free and you can access the money whenever you want. However, to keep the bonus you need to put the money towards buying a first home worth up to £450,000 or wait until you reach the age of 60, after which you can use the money for any reason.
Personal savings allowance
The personal savings allowance means that basic-rate taxpayers can earn up to £1,000 of interest on savings without having to pay any income tax. Higher-rate taxpayers can earn up to £500 interest tax free.