The personal tax year comes to an end on 5th April, and with it, the chance for you to use the annual tax allowances and exemptions. Here are six ways you could make the most of them.
Paying the right amount of tax is a good thing. Paying more tax than you need to is, well, just not smart.
To help you get your finances in order and not pay more tax than necessary this year, we’re sharing six ways in which you could make the most of the tax breaks provided by the government.
But time is of the essence — the current tax year ends on 5th April and, with it, your chance to use some of these allowances.
1. Max out your ISA allowance
ISAs are a good way to shelter savings and investments from income and capital gains tax. By using your full ISA allowance every year — it’s £20,000 for the current tax year — you could, over time, accumulate a large pot of tax-sheltered money. Not only will this save you tax, it will also make your tax return simpler as ISA savings aren’t included.
There are two main types of ISAs available to adults living in the UK.
With a cash ISA, all interest earned on your savings is tax-free if it stays in the ISA. However, given interest rates are relatively low, inflation may mean cash ISA’s lose value in real terms.
The stocks and shares ISA offers a tax-efficient way to invest. You pay no tax on dividends and interest earned, and no capital gains tax. Stocks and shares ISAs, over the longer term, could deliver a higher return than cash ISAs and your money is more likely to keep pace with inflation. But remember that, as with all investing, there is a risk that the value of your investments could fall.
2. Review your pension arrangements
A pension may be a good way to invest your money for the future because you can get tax relief on the payments you make to your pension pot.
The government adds 25% to contributions you make to your pension, up to a certain limit. This limit is based on your annual earnings and capped at £40,000. You can carry forward your annual pension allowance for up to three years, but you still need sufficient income in the current tax year to cover the contribution you make.
Paying into a pension is particularly useful if you have a higher income, as you start to lose your tax-free personal allowance when you earn more than £100,000. You may be able to get this back as your income on your tax return is adjusted to take pension contributions into account. The same calculation applies to the loss of child benefit.
Bear in mind though that, if your ‘adjusted’ income is over £150,000 for this tax year, you will have a reduced annual pension allowance.
Not sure how much you need to be putting away each month to afford the lifestyle you’d like in retirement? Use our pension calculator to work it out.
3. Use your dividend allowance
Introduced in April 2016, the tax-free dividend allowance means you can take £2,000 of dividends without paying any income tax. This is irrespective of any non-dividend income you may have.
So, if you’re a shareholder or a director of a company, or any investor who earns dividends outside a stocks and shares ISA, make sure you’re making the most of this tax-free allowance before the end of the current tax year.
4. Be smart with your capital gains tax allowance
If you sell investments that are not in an ISA or pension, you will pay no tax on the first £11,700 of profit you make on the investment — your capital gains tax allowance.
It’s not possible to carry this allowance over to the next tax year so, if you’re planning to sell a portfolio that has done very well with gains greater than your capital gains tax allowance, it may make sense to split this over more than one tax year.
5. Donate and save
By making charitable donations, you can help good causes while reducing the amount of tax you pay. You can get full tax relief on contributions you make to registered charities.
To make the most of this tax relief, take some time before the end of the tax year to check what donations you’ve made and consider making more.
Gift-aided donations operate in a similar way to pension contributions in that they can effectively reduce your income for tax purposes and adjust tax thresholds — and therefore particularly helpful for higher income earners.
Not sure how to check how much you’ve given this year? If you’ve donated via ‘Just Giving’ or a similar website, your account should reveal your donations. The website will probably have claimed the basic rate tax relief on the charity’s behalf, but if you’re a higher rate taxpayer you’ll need to reclaim the higher rate through your tax return.
6. Give to your loved ones
Did you know that inheritance tax rules allow you to give away up to £3,000 a year without incurring any death duties? You can give more than that, but larger amounts are only tax-free if you, as the giver, live for seven or more years beyond giving the gift.
You can also carry forward one unused year of gifts, so you could use this tax break to donate a total of £6,000 in any one tax year. This might be beneficial if you want to help towards those ever-increasing expenses faced by your children or grandchildren.
There is also a small gift exemption of £250 available. This allows you to give gifts to as many people as you want, provided they haven’t also received part of your main £3,000 allowance.
If you are thinking of giving a gift, make sure you can absolutely afford to do so, and that it’s in accordance with any other inheritance or estate planning you have in place.
Use them or lose them
The current tax year ends on 5th April. While some of these tax breaks can be carried forward to future years, some can’t – like your ISA allowance and capital gains tax allowance.
If you haven’t yet taken the time to review your finances and make the most of these exemptions, now is the time.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance. Tax rules may change in future. ISA and pension rules apply. If you’re unsure if an ISA is right for you or you need help with pensions, please seek financial advice.