Can you believe it’s nearly the end of the tax year?
This is the time of year when investors suddenly realise they need to put their skates on in order to make the most of the dwindling number of tax-saving vehicles available to us
- Maximise your pension payments
- Use up your ISA allowance
- Don’t forget your Capital Gains Allowance (CGT)
- Invest for your kids
- Give it away for IHT
- Keep your personal allowance in mind
- Think of other tax breaks
- Get yourself sorted for the next tax year
The pension annual allowance for this tax year is £40,000 or 100% of earnings if that is lower.
This includes contributions made by both you and your employer, if you have one.
The good news with pensions is that your annual allowance can be carried forward for up to three years. This means that if you didn’t use up all your allowance over the last three years and you happen to have a lot of cash around this month, you can put a lot more than £40,000 in. Just be aware that you’ll only get tax relief on personal contributions up to 100% of your earnings for that year.
You get tax relief at
- 20% for basic-rate taxpayers
- and higher and additional rate payers can reclaim an additional 20% or 25% tax relief respectively through their tax return.
That means that for basic-rate taxpayers every £1 in their pension only costs them 80p and for higher-rate taxpayers every £1 in their pension only costs them 60p.
All UK citizens over 16 can have an ISA and put up to £20,000 in per year.
With ISAs there’s no tax relief on the money you put in (as you have with pensions) but there is tax relief on any gains or interest your investments receive.
There are various different types of ISAs including Stocks and Shares ISAs, Cash ISAs, Innovative Finance ISAs and more. You can mix and match your money each year if you like and put some in, say a Cash ISA and some in a Stocks and Shares one. Also you can pick a completely different ISA each new tax year or stay with the same one you had last year.
Do be aware that with ISAs, you don’t use all the allowance it can’t be carried forward to future tax years, so you lose it for good. Investors with spare money they plan to save and any unused ISA allowance for this year should consider using it before the 5 April deadline.
Top up your lisa
A fairly recent type of ISA that is available to 19-39-year-olds is the Lifetime ISA (LISA) which involves
- an annual limit of £4,000 contribution
- 25% extra money from the government on any money added in (up to £1,000 per year)
So if you have some spare cash you were planning to put into your Lifetime ISA and still have some of this year’s allowance left, make sure you do it before the tax year end and claim that free cash. Just be aware that you can withdraw Lifetime ISA money once you’ve reached age 60 or earlier to buy your first property, but if you take the money out for any other reason (apart from severe ill health) you’ll pay an exit penalty of 25%.”
bed and isa
If you’ve got investments outside of your ISA you can use something called “Bed and Isa” to funnel them into an ISA and protect them from tax.
“You need to check you’ve got some of your £20,000 ISA allowance left,” says Laura Souitar from AJ Bell,” and then use your investment platform’s Bed and ISA service, which means the investment outside of the ISA is sold, the proceeds moved into an ISA and used immediately to purchase the same investment within the ISA.
“You just need to be aware that if you’ve made any gains on the investment outside an ISA you may have to pay tax on them when you sell them as part of this process. For this reason lots of people sell enough of the investment to take them up to their capital gains tax free allowance of £12,300. Which takes us neatly on to.”
protect your dividends
If you have lots of income-producing investments outside an ISA or pension you will face a higher tax rate this year, if you earn more than £2,000 in dividends in a tax year.
That’s because the dividend tax is rising, with an extra 1.25% being added to all the tax rates.
So any dividend income you get above this amount is taxed at
- 8.75% for a basic-rate taxpayer,
- 33.75% for a higher-rate taxpayer
- 39.35% for additional-rate taxpayers.
So someone with £10,000 of dividends outside an ISA will pay an extra £100 a year in tax.
Try to put your income-producing investments inside an ISA.
You can use the ‘bed and ISA’ process to move assets into an ISA, but if you have too many investments to move them all in one tax year at least put in the ones that pay the highest dividends.
You can make investment gains of up to £12,300 in 2021/22 without paying any tax. In other words, you can sell shares or other assets and make a profit on them of up to £12,300 before having to pay tax on it.
Gains over that amount are added to your income and
- if they fall in the basic-rate tax band are taxed at 10%
- if they fall in the higher-rate tax band they are taxed at 20%.
- An extra 8% is added to the tax rate if the gains are from a second property.
The annual Capital Gains tax-free allowance cannot be carried forward into future years
If you have a spouse you can get double this allowance as you can transfer investments to your spouse to use their annual CGT allowance too.
This means that for the current tax year you can potentially lock-in up to £24,600 of gains before you pay tax.
You pay CGT on ‘chargeable assets’ such as:
- Most personal possessions worth £6,000 or more, apart from your car
- Property that is not your main home
- Your main home if you have let it out, used it for business or if it is very large
- Shares that are not in an ISA
- Business assets
Laura Soutar of AJ Bell says “the annual tax-free allowance in the 2021/22 tax year is £12,300. The rate you pay after this depends on the level of income tax you pay – 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, plus an additional 8% if the gains are made from a second property.
Heather Owen from Quilter adds “importantly, your annual CGT tax-free allowance cannot be carried forward into future years, so if you do not make full use of it in this tax year then it will be lost. It is important to seek financial advice to ensure you make the best use of your allowance and are paying the correct amount of CGT if necessary.
Like adults, children also have tax allowances that can be used each year. They can earn up to £12,570 per tax year before paying tax on it.
They also have access to ISA and pension investments.
The Junior ISA allowance is now £9,000 a year,.
They won’t be able to access the money until they are 18, at which point it automatically turns into a normal ISA and transfers into their name, giving them full access. They could continue to add money to it for future use or simply take it all out and spend it.
Laura Soutar explains “if you contribute the maximum £9,000 each year and achieved a 5% investment return after charges each year, the pot would be worth almost £266,000 by the time your child turns 18. If they don’t touch the fund and don’t pay any more into it, the pot would hit £1m by the time they turn 46. For many families putting the full £9,000 into the pot isn’t realistic, particularly if you have more than one child. But even a more modest £50 a month, earning 5% returns a year, would give your child a £16,000 present on their 18th birthday.”
You can also pay up to £2,880 into a Junior SIPP each year, with government tax relief automatically boosting that to £3,600.
The advantages of this are of course the extra money put in by the government and also the fact that the fund has decades to grow so even very small amounts of money put in now will grow to something impressive by the time they come to retire.
Your child won’t be able to access the money until they are at least age 57.
So, if you pay in the maximum each year until your child turns 18 and they don’t contribute anything else, assuming 5% investment returns each year after charges, the pot would be worth £713,000 by the time they turn 57 or just over £1.1m by the time they hit the current state pension age of 66.
If you are thinking about your inheritors, now is a good time to make sure you max-out the amount you can give away each tax year without it being taken as part of your estate.
Heather Owen of Quilter says“Ii you’re able to do so, it’s great to be able to give money to loved ones to help them and mitigate inheritance tax (IHT). However, it is important to remember that cash gifts can count as part of your estate for IHT purposes.
“Gifting money to your loved ones is a tax efficient option as each tax year you can gift up to £3,000 IHT free, and a couple can combine their allowances so £6,000 can be gifted. If you have any unused allowance, you can carry it over for one year. Though it is important to remember that any gifts over this amount may be liable for IHT.
“It is important to speak to a financial adviser as they can help support you in making the best decisions for your circumstances.”
Most people can earn up to £12,570 – currently frozen until 2025/26 – from income sources such as your salary or rent before paying income tax. This is your personal allowance.
Make sure you’re on the right tax code so that you don’t pay more tax than you have to.
You can find your tax code on your last payslip. If you think it is wrong, you should contact HMRC as soon as possible.
Heather Owen adds “Ii you are a business owner, it may be a beneficial to check your balance of salary and dividends to help make the most of your personal allowance and lower tax rate on dividends.
“Additionally, if you are married or in a civil partnership, you may be able to save money by structuring your finances as a couple. If one of you does not pay tax, or earns less than the personal allowance, and the other pays income tax at the basic rate, you can transfer £1,260 of your allowance to your partner.”
Do check that you’re claiming any Government tax-breaks that you’re eligible for, such as the marriage allowance or claiming tax-free childcare, which gives a 20% top-up to money you use for childcare.
If you have to wear a uniform for your job you can also claim some tax relief on the cost of cleaning it. Make sure you add that in,
If you tend to get to this time of the year and wish you’d done all of this months ago, get yourself sorted for the next tax year to make it easier for yourself next March!
set up standing orders for pensions and isas
You can easily set up standing orders or direct debits that will automatically transfer the money into your investment account each month (maybe on payday) and then set up regular investing on your platform, which will automatically buy the funds or shares you’ve chosen.
Laura Soutar says “many investment platforms will allow you to start from as little as £25 or £50 a month. You can always pause it one month if you need to skip a month, but it means you don’t have to actively log-in and invest money every month. What’s more it can help to smooth out any short-term volatility. If stock prices fall, you are investing at that lower price and could benefit even more over the long term if prices rise.”
set up automatic dividend reinvestment
Any dividends from investments in your ISA can be withdrawn tax-free, but if you don’t need the income now you could use them to turbo-charge your returns.
If you reinvest them you can buy more shares in the same investment, which can have a dramatic impact on the size of your ISA fund over the long term.
Laura Soutar says “let’s assume someone invests the full ISA allowance of £20,000 and we assume a compound annual growth rate of 5% and annual dividend yield of 4% a year. The initial £20,000 will be worth £53,066 after 20 years, and on top of that £26,453 would also have been banked in cash dividends, to give a total return of £79,519. However, an investor who reinvests the dividends rather than banking them would have £112,088 – more than £32,500 extra. The figures become even more attractive over longer periods:”
|5% compound annual capital return only||Dividends paid in cash (4% yield)||Investment value + cash dividends||5% compound annual capital return PLUS 4% dividend yield reinvested||Difference|
|After 10 years||£32,578||£10,062||£42,640||£47,347||£4,707|
|After 20 years||£53,066||£26,453||£79,519||£112,088||£32,569|
|After 30 years||£86,439||£53,151||£139,590||£265,354||£125,764|
(Source: AJ Bell)
This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.