A tax year runs from 6 April to 5 April, so effective tax planning needn't be a mad March rush to use up your ISA allowance. It can be beneficial to review your tax opportunities during the year too.
In an ideal world, tax planning wouldn’t be left until towards the end of the tax year. Here’s our list of handy hints to help you get ahead*.
The list below isn’t exhaustive, and if you would like advice on any of it, consider speaking to a financial adviser. Find out more about getting advice.
1 Your ISA allowance: Use it if you can!
With a cash ISA or a stocks and shares ISA (or a combination of the two) you can save or invest up to £20,000 a year tax free.
To help you maximise the benefits of ISAs for you and your family, here are four things to consider when planning for the year ahead…
If you are in a position to, it makes sense for you and your spouse to take advantage of each other’s ISA allowance, particularly if one of you has more financial resources than the other. That way, you can save (in the case of cash ISAs) or invest (in the case of stocks and shares ISAs) up to £40,000 in 2018/19.
Currently, 16- and 17-year-olds actually get two ISA allowances, as they’re able to open a Junior ISA (which for 2018/19 has a limit of £4,260) and an adult cash ISA. This means that you can put away up to £24,260 in your child’s name tax free this tax year.
People aged 18-39 can open a Lifetime ISA, which entitles them to save up to £4,000 a year until they’re 50. The government will top up the savings by 25%, up to a maximum of £1,000 a year.
Remember: Some cash and stocks and shares ISAs are flexible; meaning you can take money out and replace it within a tax year without it affecting your allowance. But not all ISAs are flexible, so check your terms and conditions.
2 Consider topping up your pension
Normally, between you and your employer, you can pay a maximum of £40,000 into your pension in a tax year (it’s called your annual allowance) before it becomes subject to tax.
Take steps to maximise your pension pot. Here are some things to consider…
1 If you don't manage to make full use of your £40,000 pensions annual allowance this tax year, you can carry it forward for up to three years.
2 You can also boost your basic State Pension by paying voluntary Class 3 National Insurance Contributions (NICs).
3 Everyone is entitled to a tax-free Personal Allowance. This is the amount of income you don't pay any tax on, and currently stands at £11,500. But you begin to lose this when you earn over £100,000** (and you don't get anything if you earn £123,000 or more).
However, by upping your pension contributions, you could get some of your allowance back, as the income on your tax return will be lower to take your extra pension contributions into account.
3 Limiting inheritance tax
You can act at any time to help reduce a potential inheritance tax (IHT) bill when you’re no longer around.
One way you can do this is by giving away up to £3,000 worth of gifts* (such as money or possessions) each tax year, so they are no longer included when the value of your estate (property, money and possessions) is calculated. This is known as the annual exemption.
An IHT bill only applies if your estate is valued above £325,000***.
The exemption applies to individuals – so as a couple you can make £6,000 worth of gifts. It can also be carried forward for one year so, if you didn’t do this last year (2017/18), then you can, as a couple, make £12,000 worth of gifts before 6 April 2019. Who might the lucky recipients be?
4 Making charitable donations
Will you be donating to any worthy causes this 2018/19 tax year? If you are, you can receive full tax relief on your contributions**** through Gift Aid, or straight from your wages or pension via Payroll Giving.
If you’re a higher rate taxpayer (i.e. if you pay 40% or 45% tax) you can claim back the difference between the tax on your donation and what the charity got back. You’ll need to give details when filling out your Self-Assessment tax return (if you’re not required to fill one of these out, get in touch with HMRC).
If you don’t usually Gift Aid your charitable donations, it’s certainly worth considering, as charities can claim an extra 25p for every £1 you give – and it doesn’t cost you a thing. Charities will normally provide you with a form to fill out to declare you’d like Gift Aid to be claimed on your gift. If you haven’t got one, the charity will happily supply it.
5 Be savvy with your capital gains tax allowance
Capital gains tax (CGT) is a tax on the gains (i.e. profit) you make when you sell something, such as an investment portfolio or second home.
But everyone has an annual allowance before CGT applies, of £11,700 (in 2018/19). Like the ISA allowance, it doesn’t roll over, so if you don’t use it you’ll lose out – and may have to pay more tax in the future.
Also, it’s worth remembering the allowance is for individuals, so couples have a joint allowance for 2018/19 of £23,400. Consider transferring an asset into your joint names so you both stay within your individual allowances.
Not every investment portfolio is subject to CGT. If you’re looking for a tax-efficient way to invest, a Stocks and Shares ISA could be for you. Just like any investment, it carries risk – meaning you could lose some or all of your money – but if you do make a profit due to share price increases, you won’t be required to pay CGT on it.
6 Your dividend allowance has halved
If you receive dividends outside of a Stocks and Shares ISA, or you’re a company shareholder or director, you can currently receive £2,000 worth of dividends free of income tax. This allowance reduced from £5,000 on 6 April 2018.
Hopefully you can make use of one or more of these tax pointers in 2018/19 - and ideally before the end-of-tax-year dash!
*This article originally appeared in March 2018 titled Six things to do before tax year end (for the 2017/18 tax year). It has since been updated.