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17/01/20New tax year checklist: 7 things to do before April 2020

The current tax year is almost over. Our handy checklist below is designed to help you get the most out of your money and allowances for 2019/20. If you have not already, these are seven things you should do before the new tax year starts, otherwise, you could lose some of your allowances.

1. Make use of your ISA allowance

ISAs are a great way to save and invest. Each year you can add up to £20,000 into ISA accounts, and you will not have to pay tax on interest or returns. If you have the capital and have not reached the subscription limit yet, it is worth making some additional deposits or investments in the coming months.

When using an ISA, you have two main options:

  • Cash ISA: A Cash ISA pays interest on your deposits. Your money is secure and protected under the Financial Services Compensation Scheme, assuming you stay within the limits. However, interest rates are low, and you may find that the value of your savings decreases in real terms once you consider inflation.
  • Stocks and Shares ISA: With this type of ISA, your money is invested in stocks and shares. This gives you an opportunity to create returns that outpace inflation. However, there is a risk that investment values will fall. It is important to keep in mind that you can choose the level of investment risk you want to take.

There are other ISAs too, which can be useful in certain circumstances. A Lifetime ISA (LISA), for example, may be valuable if you are aged 18-39 and either saving for your first home or towards retirement, as the LISA comes with a 25% government bonus (but a lower cap on subscriptions of £4,000), whilst an Innovative Finance ISA may be suited to those with a high net worth and high-risk attitude to investing.

You can split your annual subscription between several ISA accounts, should you choose to, including different account types. As a result, you can both save in cash and invest each tax year.

If you do not use your 2019/20 ISA allowance before the end of the tax year, it will be lost.

2. Top-up your pension

Your pension is a tax-efficient way to save for retirement. However, there is an annual limit to keep in mind, called the annual allowance. You can pay in more than the annual allowance, but the excess will suffer an income tax charge which, for your own contributions, has the effect of clawing back your tax relief on the excess funding. If you have yet to reach your pension annual allowance and you have the capital to invest long term, it can be worthwhile to top up your pension funding.

Bear in mind that, in addition to the annual allowance limit, you will only receive tax relief on contributions up to 100% of your earnings or £3,600 per tax year if more. The 100% of earnings limit doesn’t apply to employer contributions. The annual allowance is a limit on contributions (or funding) from all sources combined.

Your annual allowance will depend on how much you earn. Usually, it is £40,000, and this includes the contributions you make, as well as those made by your employer or other third parties (or the annual increase in benefits for defined benefit schemes).

However, if you have higher income, you may be affected by the tapered annual allowance. If you have ‘adjusted income’ over £150,000 and ‘threshold income’ above £110,000, your annual allowance will reduce by £1 for every £2 of income over £150,000. The maximum reduction is £30,000. So, if you have adjusted income of £210,000 or more, your annual allowance would be just £10,000. Adjusted income is broadly your total income plus employer pension contributions and threshold income is the same but excluding all pension contributions (employee and employer).

Crucially, if eligible, your unused pension annual allowance can be carried forward for up to three years. So, if you did not make full use of your allowance in the previous three years, you may have a higher annual allowance for the current tax year.

3. Provide a gift to loved ones

If Inheritance Tax is a concern for you, using your gifting allowances is one way to pass wealth on to your loved ones now.

If the entire value of your estate, this includes all your assets, such as property, savings, investments and material assets, is more than £325,000, your estate may be liable for Inheritance Tax. Gifts that are given within seven years of your death may also be included in your estate for Inheritance Tax purposes unless they are covered by one or more of the gifting allowances.

Each tax year you can gift up to £3,000 without having to worry about Inheritance Tax; it will be immediately considered outside of your estate. If you did not use this allowance, it can be carried forward for one year as long as the current year’s allowance is also fully used. So, if you did not make use of the gifting allowance in 2018/19, now is your last chance to do so – you need to use the current year’s £3,000 allowance to enable last year’s allowance to also be used.

Other gifting allowances are also available.

Are you worried about Inheritance Tax? There are often steps you can take to minimise liability and ensure you pass as much as possible on to loved ones, please get in touch to find out more.

4. Utilise the Capital Gains Tax allowance

Capital Gains Tax (CGT) is a tax you pay when you sell certain assets and make a profit. This could include a Buy to Let property or investments that are not held in an ISA.

The rate of CGT will depend on the asset you are selling but it can be as high as 28%. However, each tax year, you can make  a certain amount of profit without being liable for CGT – this tax year the figure is £12,000 (called the annual exempt amount). As a result, timing when you make a sale could save you money.

If you do not make full use of your CGT exempt amount, you are not allowed to carry it forward to next year.

5. Consider the dividend allowance

If you own shares in a company either directly or via collective investment funds and receive dividend payments, you may need to pay tax on this income if you have already used your £2,000 dividend allowance. The first £2,000 of dividends in the tax year is tax free and the rate of dividend tax on any excess will depend on the tax band the dividends fall into when added on top of your other income. For dividends falling into the basic rate band, the tax rate is just 7.5%. However, if the dividend income falls into the higher rate or additional rate tax bands, the dividend tax rate increases to 32.5% and 38.1% respectively.

The dividend allowance does not apply to shares held within an ISA as these are already tax free. Dividend payments can also be free from tax if they fall within your annual Personal Allowance. This is the amount you can earn from all sources of income tax-free in a single tax year – it is currently £12,500.

6. Fill in National Insurance gaps

Your National Insurance contributions play a role in how much State Pension you receive. To be entitled to the full State Pension, which is expected to be £9,110.40 annually for 2020/21, you must normally have 35 years on your National Insurance record. People who have paid, or been credited with, National Insurance before 6 April 2016 receive the greater of their state pension entitlement under the old and new systems and may therefore receive a full state pension with less than 35 years of NI contributions in some cases.

Why is this important as the end of the tax year approaches? You can make additional contributions to cover gaps going back over the last six tax years, so the deadline for filling the NI gap for the oldest year will be the end of this tax year. If you have gaps that could affect your State Pension, it is often worthwhile making these additional payments to receive the full amount. Keep in mind though, if retirement is still some way off, you may still hit the 35 years (or less in some cases) required without making extra contributions.

7. Build a nest egg for children and grandchildren

It is not just your own allowances that reset at the start of a new tax year. Those that affect saving for children do too.

If you are putting money away into a Junior ISA (JISA), for example, you should maximise the amount you can tax-efficiently save if possible. This tax year, you can add up to £4,368 into a JISA. As with an adult ISA, the interest from a Cash JISA or returns from a Stocks and Shares JISA are tax-free. The JISA allowance cannot be carried forward, so if you do not use it this tax year, the 2019/20 allowance will be lost. Money paid into a JISA is locked away until the child turns 18 when they will be able to access it as they wish, including leaving the funds in an adult ISA account. NB: Any child holding a Child Trust Fund (CTF) cannot have a JISA opened for them unless the CTF funds are first transferred over to a JISA and the CTF closed. Alternatively, up to £4,368 can be contributed to the CTF.

You can also pay into a child’s pension. Individuals that do not earn an income, including children, can add up to £2,880 to a pension each tax year and benefit from tax relief. Deposit the maximum amount and tax relief effectively means your investment grows to £3,600 instantly. Pension funds will  not be accessible until the child reaches the minimum pension age. At the moment, this minimum age is 55, but this is expected to rise.

If you would like to discuss your allowances as the end of the tax year approaches, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate Tax Advice, Estate Planning or some Buy to Lets.

This article is for general information only and is not intended to be individual advice.