Make the most of your tax breaks before the tax year end
ISA allowance
ISAs are often the first port of call for investors looking to save tax. They are simple, flexible and tax-efficient. By using your full ISA allowance each year (£20,000 in the current 2017/18 tax year) it’s possible to build up a large pot of money sheltered from capital gains tax or income tax. This is especially important given that the amount an individual can receive in dividends without paying tax will be cut from £5,000 to £2,000 from 6th April 2018.
The ISA allowance is available to any UK resident over 18 and can be split between different types – the main ones being Cash and Stocks & Shares. Stocks and Shares ISAs could deliver a higher return than Cash ISAs over the longer term, but remember that there is a risk the value of your investments could fall – especially in the short term.
Pension contributions
Almost everyone includes a comfortable retirement as one of their financial goals. Pensions are often a highly effective means of achieving this due to the tax relief available on payments into them.
Currently, anyone under 75 with relevant UK earnings can receive tax relief when they make a contribution within the annual allowance to a personal pension such as the Charles Stanley Direct SIPP. 20 per cent is added by HMRC and any further higher or additional rate income tax relief can be reclaimed – potentially a simple way of reducing your income tax bill for the year.
Tax relief on your personal contributions is limited to 100 per cent of your relevant UK earnings. Contributions, including those paid by your employer, are also subject to the annual allowance, which for the 2017/18 tax year is usually £40,000. However, those with ‘adjusted’ income over £150,000 for this tax year have a reduced annual pension allowance, the minimum being £10,000.
It is also possible for non-tax payers to benefit. In the 2017/18 tax year individuals under age 75 can contribute up to £2,880 to a pension and receive a further £720, resulting in an overall contribution of £3,600. In addition to upfront tax relief, money in a pension is free from capital gains tax and any income tax.
CGT allowance
This tax year you can realise profits on investments of up to £11,300 free from capital gains tax(CGT). If you have holdings outside an ISA or pension that are showing a gain it may be worth selling them and buying them back in a tax-efficient wrapper. This “crystallises” the gain and could reduce the amount of tax you would have to pay in future – it could also be a good way of using your ISA or pension allowances. This process is also known as a “Bed & ISA” or “Bed & SIPP” depending on which is used.
It’s not possible to carry the CGT allowance over to the next tax year so, if you are planning to sell assets that have gone up in value more than your capital gains tax allowance, it may make sense to split this over more than one tax year.
Inheritance Tax
Inheritance Tax (IHT) is currently payable at a rate of 40 per cent on estates worth over a threshold of £325,000 for the basic allowance. Married couples and Civil Partners can pass their thresholds between them meaning that there is normally nothing to pay on the first £650,000. A ‘main residence’ allowance increases this figure to £825,000 at present and this is set to rise incrementally to £1m by 2020.
The simplest way to reduce the size of your estate, and a potential IHT bill, is to gift money to others, perhaps children or grandchildren to help them out financially. Gifts exempt from IHT include an annual £3,000 lump sum, which can be given to one person or divided between a number of people, plus £250 a year to as many people as you like.
Junior ISAs
Junior ISAs are a popular way for family and friends to build up tax-efficient savings and investments for a child. Withdrawals are possible from age 18 when it automatically converts to an adult ISA, meaning the pot can be useful to help with the cost of university or a deposit for a house. A parent or legal guardian of an eligible child can open a Charles Stanley Direct Junior ISA online, manage the account and make the investment decisions. Grandparents, relatives or family friends can then also contribute up to the annual investment limit, which this tax year is £4,128 per child.
The taxation of pensions is based on individual circumstances and may be subject to change in the future.
The information contained within this article is based on our understanding of current UK tax provisions, which is subject to change, and the benefits of which would depend on your personal circumstances.
This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.