WITH the end of the tax year on April 5 fast approaching, now is a good time to review your finances and make the most of any annual allowances before it is too late.
Individual savings accounts (ISAs) are one of the most tax-efficient ways to save because there is no capital gains tax or further income tax to pay on assets held in an ISA. You can invest up to £15,240 into an ISA this tax year, in any combination of cash and stocks and shares, with the limit rising to £20,000 as of April 6.
Jason Hollands of investment services and financial planning company Tilney noted that anyone looking to invest in a stocks and shares ISA should take their time picking their investments, even though the end of the tax year vis fast approaching.
Loading article content
“At this time of year, the pressure is on to beat the deadline for ISAs and it is very easy for investors to make hasty decisions that they might later regret,” he said, adding that most ISAs allow investors to secure their allowance with cash and choose the investments later.
“It is better to do this and then spend some time taking a considered view of where to invest it after the melee is over, than making a rushed decision,” he added.
Pension contributions also qualify for tax relief, meaning that if you are a basic-rate taxpayer, for every £80 you pay into a pension from your post-tax pay, the Government contributes a further £20. Higher and additional rate taxpayers can usually claim back the difference on their self-assessment tax return. For example, a 40 per cent taxpayer could claim back a further 20 per cent, so a £100 pension contribution would cost £60.
You can contribute as much as you want into a pension but you only get tax relief up to the amount you earn. In other words, if you earn £25,000 but make pension contributions of £30,000, you will get tax relief only on the £25,000. The annual allowance for most people is also capped at £40,000.
If you have any unused annual pension allowances from the past three tax years, you may be able to use them this year. You could also benefit from the higher allowance of £50,000 in the 2013/14 tax year, which means you could potentially save £170,000 into your pension, including this year’s allowance.
Ed Monk, associate director for personal investing at Fidelity International, said: “If you are in the fortunate positon of maxing out your contributions this year, then you could use carry forward to take unused allowance from the three previous to give your pension a bumper injection.”
Your total contribution must be within 100 per cent of your earnings to receive full tax relief. With tax relief of up to 45 per cent, £170,000 in a pension could cost a high earner as little as £93,500, according to advisory business Chase de Vere.
You do not have to pay tax to benefit from pension tax relief because non-earners can make an annual pension contribution of up to £2,880 and qualify for 20 per cent tax relief. If they put in the maximum, the Government would therefore add £720.
Gains from the sale of assets, such as shares, are potentially subject to capital gains tax (CGT) of up to 20 per cent, but you only have to pay CGT on gains above the annual tax-free allowance of £11,100 in the current tax year.
The annual CGT exemption is often overlooked, according to Hollands. He said: “Regular use of the allowance to crystallise gains by selling shares or funds you own outside of ISAs and pensions can help reduce a nasty future tax liability building up over time.”
Hollands added: “If you hold shares or funds outside of ISAs and pensions, making use of your capital gains allowance and then using the proceeds to fund an ISA contribution – a process known as Bed and ISA - could also help you avoid being caught out by the cut to the tax-free dividend allowance from £5,000 to £2,000 announced in the Budget, which will kick in in April 2018.”
If your estate is worth more than £325,000 when you die, your family could be liable for inheritance tax (IHT) at 40 per cent. A good way to reduce the value of your estate is to make use of the annual gift allowance, which means you can give away up to £3,000 a year - and up to £3,000 from the previous year if the allowance was not used - without incurring IHT.
You could also make the most of the small gifts exemption, which allows you to make gifts of up to £250 to an unlimited number of people without incurring IHT. Just make sure you keep written records of any gifts.
Adventurous investors who are happy to take higher risks in return for potentially higher rewards could consider investing in a Venture Capital Trust (VCT).
Sian Thomas, a financial planner at Hargreaves Lansdown, said: “VCTs invest in some of the most dynamic, entrepreneurial, high-growth companies and are long-term, speculative investments that give you the chance to get in on the ground floor of fledgling investment opportunities. For those who pay sufficient tax, a £10,000 investment in VCT could cost as little as £7000 after tax relief.”