Tax year end is nigh – here’s how to make the most of your allowances
As we step into March it’s time to look ahead to the warmer, sunnier days of Spring. And, somewhat less romantically, to the end of the financial year on 5 April.
The UK’s unusual tax year dates (many other countries including France, America, and Germany work to the calendar year) can be traced back to the Middle Ages. Back then the tax year began on 25 March – the date of a religious festival known as Lady Day. In 1752 it was moved to April 5 as part of the UK’s move from the Julian to the Gregorian calendar. In 1800, it was moved to 6 April to compensate for the fact that leap years in the old and new calendars didn’t match up, and we’ve worked to those dates ever since.
Weird and wonderful though our tax year dates may be, there’s no escaping the fact that they can have an impact on your life. April 5 brings with it end of your opportunity to make the most of several allowances – and potentially give your savings a boost.
ISA opportunities
While some annual allowances can be carried forward into the new financial year, when it comes to ISA allowances it’s a case of ‘use it or lose it’. You can invest up to £20,000 in your ISA each year without having to pay tax on the income, capital gains or interest (the only time your ISA may become liable for tax is if you leave it to someone other than your spouse or civil partner and your estate is above the Inheritance Tax threshold).
Tax-free savings opportunities are few and far between, so it pays to make the most of them and top up your ISA(s) as much as you can to minimise your tax liabilities.
Boost your pension pot
If you’ve received an annual bonus you’re looking to invest, or you have surplus funds after topping up your ISA, paying into your pension could help you reduce your tax bill thanks to Income Tax Relief. And the good news is that if you don’t use all your £60,000 annual allowance you can carry it forward to the next financial year for a maximum of three years.
There are some stringent rules around ‘carry forward’ and, depending on your circumstances, your allowance may be lower than the usual £60,000, so this is just one example where financial advice based on your personal circumstances is vital.
Income Tax Relief allows you to exclude some of your income from assessment when you invest in your pension this way. If you’re able to do this early on and ‘frontload’ your pension pot, you’ll also reap the benefits of earning compound interest.
Income Tax
When you look at your monthly payslip – or sign off your annual tax return – it’s easy to assume that income tax is something you can’t do much about. But if you’re married (or in a civil partnership) making the most of your Marriage Allowance can help reduce your tax liability by increasing your personal allowance.
Around 2 million eligible couples in the UK are missing out on this opportunity – make sure you’re not one of them. If your spouse or civil partner doesn’t work or earns less than their personal allowance (£12,570), then – providing you earn more than them but are still a basic rate taxpayer – then they can gift you £1,260 of their personal allowance. It may not be a huge tax saving, but as they say at a certain supermarket, every little helps.
Capital Gains Tax
The Capital Gains Tax allowance is now just £3,000 – half of what it was last financial year, and a fraction of the old rate of over £12,000. But it’s not all bad news. Unless you’ve been lucky enough to sell off a Picasso in the last year, it’s perfectly possible that your profits from the sale of assets such as shares, cryptocurrency, or fine jewellery, aren’t too much above that threshold, so you won’t face a nasty tax bill. If you’re in a position to be able to comfortably sell such assets, you could generate a tax-free sum that you’re able to invest in an ISA or your pension.
Inheritance Tax – allowances can be a real gift
If you expect to leave an estate worth over £325,000 and wish to reduce the tax burden on those you leave behind, it makes sense to make the most of all the gift allowances associated with Inheritance Tax (IHT). And there are plenty of allowances to explore here.
The main allowance is the annual tax exemption for £3,000 worth of gifts – this can be to one person or several and can be carried forward into the next financial year if it’s not all used. In addition to this, you can gift £250 to as many people as you wish (provided they didn’t receive any money from you when you gifted the £3,000). You can also gift money to anyone who’s getting married or entering a civil partnership, even if they’ve already received a gift from your annual exemption allowance. For wedding / civil partnership gifts, you can give up to £5,000 to your children, £2,500 to grandchildren and great grandchildren, and up to £1,000 to other relatives and friends. In addition to this you can make regular payments – normal expenditure out of income – for things such as paying school fees or supporting an elderly relative.
So, the message is, don’t wait until it’s too late; check to see whether you’re making the most of these allowances, and get in touch if you’d like some help. If you’re already a client, feel free to check in with me if we haven’t discussed tax year end.