If you don't use it, you'll lose it

By Drew Mitchell

As the end of the tax year is fast approaching, we look at 8 simple steps you should be considering before Thursday 5th April 2018. As this only happens once a year, it’s well worth reviewing your finances with regards to some of these specifics and speak to your advisor to get them implemented before you lose them.

 

  1. MAKE THE MOST OF YOUR ISA ALLOWANCE

Probably the most important reminder for many is to ensure they are maximising their ISA contributions for the year. With last year’s increase from £15,240 to £20,000 there is extra incentive to invest as much of your surplus income as comfortably possible.

You have the option of investing into a cash ISA or Stocks & Shares, the former recently offering extremely minimal returns with the latter option offering much more handsome gains dependant on risk appetite. For many households, this will offer a combined £40,000 allowance and great starting point each year for a tax free investment option to help supplement retirement provisions but also allowing access at any time.

You only have two weeks left to make these final transfers, so please get in touch with your advisor if you would like to make an additional contribution or set up a new ISA account.

 

  1. MAKE THE MOST OF YOUR PENSION ALLOWANCE

Pensions are another tax-efficient way to invest. You can get tax relief on contributions up to the annual allowance, which is £40,000 for the 2017/18 tax year. If you are currently making contributions of £20,000 a year into a pension scheme, you could be eligible for tax relief on a further £20,000 of pension contributions this year.

There are some limits on the annual allowance. For example, you can only get tax relief on contributions up to your annual qualifying earnings in any one year. So if you have qualifying earnings of £20,000 you’ll only be eligible for tax relief on £20,000 of pension contributions. Qualifying earnings include things like salary and bonuses, but don’t include the likes of dividend income or capital gains. If you no qualifying earnings or lower income, there is a minimum annual allowance that means you may be able to get tax relief on pension contributions of up to £3,600 a year.

If you earn over £150,000 the amount of contributions you can receive tax relief on is reduced on a sliding scale. The minimum tapered allowance is £10,000 for earnings over £210,000 a year.

In addition, you don’t get tax relief on contributions after you turn 75. It is important to make sure that you claim the appropriate amount of tax relief on your contributions, so if this is applicable to you, please consult your advisor to discuss during the coming weeks.

 

  1. MAKE THE MOST OF YOUR CAPITAL GAINS TAX ALLOWANCE

Everyone has an annual capital gains tax (CGT) allowance – £11,000 in the current tax year. This means you can sell or otherwise dispose of assets such as property, stocks and shares, and other valuables worth over £6,000 without having to pay any tax on the first £11,000 of gains. Note that you don’t have to pay any capital gains on your main residence property or ISA accounts.

But you can’t carry one year’s exemption to another. So if, for example, you plan to dispose of shares that will make you gains of, say, £20,000, you could make use of your CGT allowance by selling them in two trenches, one before 5th April and the other on, or after, 6th April.

Married couples and civil partners should also think about transferring assets between them to minimise their tax liability on future capital gains. The CGT allowance is an individual one, so married couples and civil partners can shelter up to £22,000 of gains between them if they share out their ownership of joint assets to each make use of their allowance.

The important thing to remember when switching assets between spouses or civil partners, however, is that any transfer must be outright and unconditional – in other words, a genuine gift with no strings attached.

 

  1. MAKE THE MOST OF YOUR CHILD BENEFIT

If you have children and you or your partner are close to the £50,000 income threshold that will trigger the loss of some child benefit, consider legal ways to keep your income down.

Lots of families have already been hit by the “high income child benefit charge”, which was introduced in 2013. Under this regime, child benefit is clawed back if either you or your partner have an adjusted net income of more than £50,000.

The clawback is at the rate of 1% of the amount of child benefit for every £100 of income over £50,000, so when your adjusted net income hits £60,000, you effectively lose all the benefit.

The most obvious way to reduce your adjusted net income, if you can afford it, is to pay more into your workplace pension scheme. For example, you might want to consider topping it up with additional voluntary contributions.

Other ways of reducing your taxable income include agreeing with your employer to sacrifice some salary for tax-free benefits (these schemes often involve things such as childcare vouchers) and giving more money to charity.

 

  1. MAKE THE MOST OF YOUR CHILD’S ISA ALLOWANCE

You could also save up to £4,128 each year in a Junior Isa for each of your children (up to age 18). As with an adult Isa, returns on money made within a Junior Isa are free of UK income tax and capital gains tax. Any money accumulated transfers to the child’s control when they reach the age of 18.

As with the adult counterparts, it is important to ensure that any funds you wish to contribute to your child’s ISA’s is done in the next two weeks. It might be worth contacting grandparents or other family members to remind them of this!

 

  1. MAKE THE MOST OF YOUR MARRIAGE ALLOWANCE

The marriage allowance could reduce the total tax a married couple pays by up to £220 each tax year. The allowance lets a non-taxpayer (that is, a person whose income is less than £11,000 – or £11,500 for the 2017-18 tax year) transfer £1,150 of their personal allowance to their husband, wife or civil partner – as long as they are a basic-rate taxpayer. If one spouse was born before 6 April 1935, then this rule doesn’t apply.

For more information on this and to apply please contact your advisor.

 

  1. THINK AHEAD AND REDUCE YOUR INHERITANCE TAX BILL

If your estate, including your home, is likely to be hit by inheritance tax (IHT) when you die and you can afford to give some money away to loved ones now, then this is the time do it.

IHT is currently paid if someone dies leaving an estate worth more than £325,000. The tax is charged at 40% on anything above that threshold, so reducing the value of the part of your estate that is above the £325,000 threshold, also known as the nil rate band, will reduce the IHT payable when you die. One way to do this is by using your annual exemption, which allows you to give away £3,000 worth of gifts a year without being liable for IHT.

You can carry over any leftover annual exemption from one tax year to the next, but the maximum exemption in one year is £6,000. On top of that, you can make small gifts of up to £250 each to as many individuals as you like. Also, there is no tax on wedding or civil partnership gifts worth up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

 

  1. THINK ABOUT GIVING TO CHARITY

Charitable donations are their own reward. But if you’re thinking about making a large donation in the near future, it could make sense for you to make it before the end of the tax year.

Gifts of cash can reduce your income tax bill for the tax year – and in some cases the previous tax year. You can also donate listed investments or property free of Capital Gains Tax, while also reducing your Income Tax liability.

Considering tax efficiency when you’re giving to charity is a way of making the biggest impact with your donations. For example, many clients set up a charitable foundation. This can maximise the amounts that are paid to the charities they support, while also providing a structure for their giving and involving the family in their charitable activity.

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Cadence Wealth Limited is an appointed representative of Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited, which are authorised and regulated by the Financial Conduct Authority. Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited are entered on the FCA register under reference 440703 and 440718. Registered in England and Wales, No: 10040034. Registered address: 1 Aire Street, Leeds, LS1 4PR