With just a few weeks until the end of the tax year, time is running out for you to use some of the valuable tax exemptions and allowances that are available.
From maximising your pension contributions to using gifting allowances, it’s important to make the most of the tax breaks available. As many of them can’t be carried forward, failing to use them by 5 April means you could lose them.
Here are five simple things you should consider before the end of the tax year:
1. Maximise your ISA contributions
In the 2020/21 tax year, each individual can save up to £20,000 a year in ISAs: a Cash ISA, Stocks and Shares ISA or, if you’re aged between 18 and 39, a Lifetime ISA.
You can split your contribution between different types of ISA as long as you don’t exceed the £20,000 limit. Note that the maximum you can contribute to a Lifetime ISA is £4,000.
ISAs are a great way of saving tax-efficiently, as you won’t pay tax on interest or investment returns. If you’re considering a Stocks and Shares ISA, you should have a medium to long-term outlook (typically more than five years).
Remember that, as your money is invested, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
You can’t carry an ISA allowance forward, so if you don’t use it by 5 April, you will lose it.
2. Use your annual Capital Gains Tax allowance
For investments held outside an ISA or pension, or assets such as a second property, the annual Capital Gains Tax (CGT) allowance is valuable. You can make investment gains of up to £12,300 in 2020/21 without paying any CGT.
Gains above the annual exemption will be taxed depending on your other taxable income:
- Standard CGT rate: 18% on residential property, 10% on other assets
- Higher CGT rate: 28% on residential property, 20% on other assets
The annual CGT allowance cannot be carried forward into future years so if you don’t use it, you lose it.
If you have made gains outside of an ISA or pension, you should consider whether to realise some of that gain before the end of the tax year to make the most of your tax-free allowance.
3. Maximise your pension contributions
The pension Annual Allowance for 2020/21 is £40,000. You can contribute up to this amount (or 100% of your earnings if this is lower) and benefit from generous tax relief on your contributions.
If you’re a basic-rate taxpayer, you receive 20% tax relief at source. So, a £100 contribution to your pension only costs you £80. If you’re a higher or additional-rate taxpayer, you can claim additional relief through your self-assessment tax return.
If your income is more than £240,000 or you’ve already started flexibly accessing your pension pot, your Annual Allowance may be lower. Speak to a financial planner for advice.
Remember also that people with no earnings can still contribute up to £2,880 to a pension in the 2020/21 tax year and benefit from basic-rate tax relief.
You can carry forward unused Annual Allowance for three years – again, speak to a financial planner as this can be a complex area.
4. Use the available allowances to save for children or grandchildren
Like adults, children also have tax allowances that can be used each year.
In the 2020/21 tax year, the Junior ISA allowance is a very generous £9,000. This enables you to start building a healthy fund to help a child or grandchild transition into their adult lives.
This Is Money report that, if you contribute the maximum £9,000 each year and achieved a 4.5% investment return after charges each year, the pot would be worth just over £252,000 by the time your child or grandchild turns 18.
If they don’t touch the fund and don’t pay any more into it, the pot would be worth £1 million by the time they turn 50.
You can also make pension contributions on behalf of a child. In the 2020/21 tax year you can pay up to £2,880 into a pension, with tax relief boosting your contribution to £3,600. Bear in mind that your child or grandchild can’t access this money until age 57 (or later, if the pension age rises). So, it may not be the best option if you want to help them save for university fees or to buy a home.
This Is Money say that, if you paid in the maximum each year into a pension until your child turns 18 and then they don’t contribute anything else, assuming 4.5% investment returns each year after charges, the fund would be worth just under £562,000 by the time they turn 57. It would be worth just over £835,000 by the time they hit the current State Pension Age of 66.
5. Make gifts
If you’re worried that you might have an Inheritance Tax liability when you die, making gifts now can help you to reduce the value of your estate, and any future tax bill.
Lifetime gifts are known as “potentially exempt transfers” (PETs) and will typically fall outside the value of your estate, as long as you live for seven years after making the gift.
In the 2020/21 tax year, you also have an Inheritance Tax annual exemption of £3,000. This means you can gift up to £3,000 and it will immediately fall outside the value of your estate.
The exemption is per person, so couples can gift up to £6,000. And, as any unused allowance from the previous tax year can be carried forward, you could gift up to £6,000 (£12,000 as a couple) before 5 April.
Get in touch
If you want to make the most of your valuable tax allowances and exemptions before 5 April, we can help.
For more information, email email@example.com or call 01904 655330.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.