Last year’s tax return may have only been filed a few short weeks ago, but already investors should be looking ahead to the Budget on 8 March and the end of the tax year on 5 April 2017, to trim the tax fat from their finances.
Sian Thomas, financial adviser at Hargreaves Lansdown, says: “Recent Budgets and Autumn Statements have brought much cheer for the investor with the introduction of the pension freedoms, Lifetime ISA, dividend allowance, increases to ISA allowances, and reductions in capital gains tax rates. However we have also seen a sting in the tail with four consecutive years of cuts to pension allowances, 8 in the last 7 years.
The Budget acts as a reminder of the importance of making the most of tax allowances before they lapse for another year and for those planning to make pension contributions this spring, it makes sense to do so before the Chancellor takes to his feet on Budget day.”
10 end of tax year saving tips
1 Use your ISA allowance
Use your ISA allowance and shelter your savings from tax. There is no capital gains tax or further income tax on assets held in an ISA, making them one of the most tax-efficient ways to save. You can invest up to £15,240 into an ISA this tax year, in any combination of cash and stocks and shares, £30,480 per couple.
2 Use your pensions allowance
Investing in a pension for retirement is one of the most tax efficient ways to save, higher and additional rate tax relief is still available. If you’re a UK resident, under age 75 and not drawing your pension, the general rule is you can contribute as much as you earn to pensions this tax year, effectively capped at £40,000. Those with “adjusted income” of £150,000 or more could see a lower, tapered annual allowance.
Broadly speaking, adjusted income is your total taxable income (including salary, dividends, rental income and savings interest) plus the value of any employer pension contributions.
3 Carry forward to boost pension contribution
If you have unused annual pension allowance from the past three tax years, you may be able to use them this year and save up to £130,000 into pension.
Your total contribution must be within 100% of your earnings to receive full tax relief. With tax relief of up to 45%, £130,000 in a pension could cost a high earner as little as £71,500.
4 Pension for your spouse
Investing in pension for a non-earning spouse is one of the most generous of government pension give-aways. Non-earners can make a £2,880 pension contribution and the government add £720, even if the individual pays no tax.
At retirement from age 55, 25% of the value of the pension fund can normally be taken as tax-free cash, with the balance being taxable. However if further withdrawals fall within the individual’s personal allowance each year, these will also be tax-free.
5 Use your capital gains tax allowance
Every year you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2016/17) the allowance is £11,100. Using your CGT allowance saves up to 20% capital gains tax on gains from shares or funds.
Making the most of your capital gains tax allowance could a save a couple up to £4,440 in CGT.
6 Register losses and use them to offset gains
Once registered, losses can be used to offset gains at any time in the future, effectively increasing your capital gains tax allowance.
7 Maximise dividend allowance and the lower capital gains tax rate
The top rate of income tax is 45% whereas the top rate of capital gains tax is 20% (shares and funds) and you can make profits of £11,100 a year (2016/17) before you start to pay CGT. The new dividend allowance also provides for £5,000 of tax-free dividends a year. Therefore it makes sense to arrange your portfolio accordingly. Once you have maximised your tax-free dividend allowance, hold income-producing assets in a SIPP or an ISA, with your growth assets outside.
8 Save inheritance tax – get gifting
One of the best ways to save IHT is to make use of your IHT exempt gift allowances. Everyone can give away up to £3,000 a year (and up to £3,000 in respect of the previous year if this allowance was not used), meaning a couple could give away up to £12,000 now and a further £6,000 on 6th April, potentially saving £7,200 of IHT over two tax years.
9 Invest in Venture Capital Trusts (VCTs) for 30% income tax relief
Taxpaying, sophisticated investors who are happy taking higher risks in return for the potential for higher rewards could consider VCTs. These invest in some of the most dynamic, entrepreneurial, high growth companies and are long term speculative investments which give you the chance to get in on the ground floor of fledgling investment opportunities. For those who pay sufficient tax, a £10,000 investment in VCT could cost as little as £7,000 after tax relief.
10 I don’t want to invest now, but how do I make sure I use my ISA/SIPP allowance?
You can invest your cash now into your ISA and SIPP and then make your investment decisions later. This ensures you use your allowances and don’t lose them.