With the end of the tax year on 5th April fast approaching, now is the time to consider a few financial planning steps.
Making the most of your tax allowances is vital in ensuring your financial affairs are organised as efficiently as possible.
To make sure of this, it’s advisable to talk to us as early as possible but ideally no later than mid-February so that any actions and/or transactions can be processed in good time before the financial year end.
The annual allowance is the total amount that can be personally paid into your pension each year for tax relief purposes. It was set at £215,000 when it was first introduced in 2006. Today it sits at £40,000 for most people (or 100% of earnings if less).
But for some it can be reduced to as little as £10,000 a year, thanks to the ‘Tapered Annual Allowance’. This extra measure was introduced to limit the amount of pension tax relief that can be claimed by high-earners. The problem is that it’s incredibly complex and there have been a number of unintended consequences.
Take, for example, the perverse effect the taper is having on the NHS. Faced with the prospect of paying extra pension tax charges, a third of doctors have already reduced their work commitments, leaving patients with fewer medics and longer waits for treatment.
If you’re in a position to use some or all of it, and are not in danger of breaching the £1.055m Lifetime Allowance for pension savings, now is the time to consider making additional contributions. You’ll receive tax relief on those contributions at the basic rate. Eligible higher rate tax-payers and additional rate taxpayers can reclaim an additional 20% or 25% tax relief via their annual Tax Return.
Talk to us early and we can help you through the maze.
ISA allowances are £20,000 per individual, thus allowing a couple to invest £40,000 between them. Don’t let these valuable tax efficient allowances go to waste. They are an important step towards helping create wealth for the future.
The amounts invested in stocks and shares ISAs continues to rise, suggesting that people are increasingly realising that Cash ISAs have proved a poor long-term investment given the rates that have been on offer. So it’s worth also reviewing your existing ISA holdings.
Bed and ISA
If you don’t have the capital on deposit and have investments which are in taxable investment accounts then it is possible to do a Bed and ISA. The idea is simple: you sell your non-ISA investments and then use the proceeds to buy them back immediately, but this time within your ISA using your annual tax-free allowance, meaning the assets are out of reach of the taxman.
It is possible to generate capital gains of up to £12,000 this year that will be exempt for Capital Gains Tax, which can assist you with building more of your taxable investments in tax efficient investments. Again this allowance is per individual.
Any investment gains above this amount will be taxable, at either 10% or 20% dependent on your marginal rate of tax.
The amount you can earn tax-free before you start paying income tax is £12,500.
A basic rate tax payer will pay 20% on taxable income between £12,500 and £50,000. This means it is possible to earn up to £50,000 before you start paying tax at a rate of 40%.
Where your earnings exceed £100,000, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. This means if you earn more than £125,000 you will lose your tax-free personal allowance.
Where your earnings exceed £150,000, the additional rate of income tax of 45% is charged on all earnings above £150,000.
The dividend allowance is £2,000, so if you don’t have other income, you’ll be able to earn £14,500 tax-free when taking into account your personal allowance of £12,500.
The Personal Savings Allowance
You might be able to reduce your tax bill further if you receive income from savings.
Basic rate taxpayers can now earn £1,000 from savings before they start paying income tax on savings income, higher rate taxpayers will only start paying tax on savings income over £500.
There is no savings allowance for additional rate taxpayers.
Each individual is entitled to a £3,000 annual exemption. It may be possible to carry forward any unused annual exemption from the previous tax year so for somebody who has made no gifts, they can make gifts of £6,000 within their annual exemptions now.
What to do next
Get in touch with one of our consultants who are on hand to guide you through making the most of all your tax-free allowances.