21/03/17Three ‘use it or lose it’ opportunities before the end of the tax year

As the end of the tax year draws ever closer, you might want to make the most of three opportunities before they escape your grasp.

This isn’t necessarily about ‘beating the taxman’. Instead, this is more about getting one last punch in before the bell signals yet another round and yet another tax year.

1. ISA Contributions – £15,240

Whether you are a saver or an investor, making use of your annual ISA (Individual Savings Allowance) to shelter your capital from tax is just plain common sense.

The introduction of the new Personal Savings Allowance means that the first £1,000 of interest received each year by basic-rate taxpayers, and £500 for higher-rate taxpayers, may have lead some savers to eschew an ISA this year. But, this month’s Budget shows just how easily allowances can be cut. To be on the safe side, we would always suggest contributing the maximum you can each year to your ISA.

The maximum ISA contribution for the 2016/17 tax year is £15,240. This is set to rise to £20,000 next year. Any leftover allowances cannot roll over to the following year, so anybody who wants to make the most of both allowances should ensure that their ISAs are filled right up to the brim.

These ‘use it or lose it’ opportunities can also have benefits if you think beyond yourself and act as a household. For example, Junior ISAs have an allowance of £4,080 meaning that a family of four could potentially tuck away £38,640 before April 6th.

The £15,240 cap applies to all types of ISA, and ever since the rules were relaxed in July 2015, you can split the allowance up as you please, so long as your overall amount doesn’t exceed the limit. So, whether you have a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA, a Help to Buy ISA or a combination of them, your potential to make the most of your allowance is now greater than ever.

2. Pension Contributions – £40,000

The maximum, subject to your earnings, that you can pay into a pension each year has decreased gradually from £215,000 in the 2006/7 tax year to £40,000 this year.

If only it were that simple though!

The £40,000 maximum applies to most people. But high earners will see their annual allowance reduce by £1 for every £2 over £150,000, to a minimum of £10,000. High earners may want to consider different solutions, such as using salary sacrifice alongside higher employer contributions. This is without doubt a very complex area, where advice is crucial if mistakes are to be avoided.

People who have not contributed the maximum to their pension in previous tax years, can ’mop up’ these unused allowances. This rule, commonly known as ‘carry forward’, is particularly useful to the self-employed, or those who see their income fluctuate significantly from one year to the next. In common with the tapered annual allowance, the ‘carry forward rules’ are complex, so seek advice before taking action.

As with ISA contributions, another opportunity arises if you think beyond yourself. Contributions to pensions can be made on behalf of children, grandchildren and non-earning spouses. The maximum that can be paid in is £2,880 with tax relief of £720 added on top. While there are downsides, especially for children who will have no access to the capital for decades, the tax-relief, paid to non-taxpayers makes it an attractive way of saving for many.

3. Capital Gains Tax Allowance – £11,100

In the 2013/14 tax year, HM Revenue & Customs reported that it collected £3.9 billion from Capital Gains Tax (CGT), which may come as some surprise compared to the £3.4 billion it collected from Inheritance Tax (IHT).

Everyone has a CGT allowance of £11,000 each year. This means gains on assets up to £11,000 are effectively tax free. Any profits realised above £11,000 are taxed as follows:

  • On all assets except residential property: 10% for basic rate taxpayers and 20% for higher rate taxpayers
  • On residential property assets: 18% for basic rate taxpayers and 28% for higher rate taxpayers
  • 10% for gains qualifying for Entrepreneurs’ Relief

Any unused CGT allowance cannot be carried over from previous tax years. If you are thinking of making disposals, perhaps of buy-to-let properties following the rule changes, or of investments to move into an ISA, these should be planned carefully.

Use it or lose it

‘Use it or lose it’ may sound a little severe, but in the words of Joni Mitchell: “You don’t know what you’ve got ’til it’s gone”.

The tax year is quickly coming to an end whether we like it or not, and the potential savings and contributions to be taken advantage should all be considered carefully. Either way, they could be just enough to keep the taxman on the ropes until April 6th arrives and the bell rings for a new round and a new tax year.