Whether you are new to the world of investing, or someone who has been putting their money to work for many years, the end of the tax year is an opportunity to the make the most of the benefits available and take steps towards your future goals.
When is tax year end?
The 2022/23 tax year runs from 6 April 2022 to 5 April 2023.
The UK’s tax year runs at a different time compared to the rest of the world (which align their tax years to the traditional January to December calendar). The UK tax year has been tied to April since the year 1800, though the origins of this choice go back even further to the Middle Ages and the ‘Lady Day’ religious festival.
Why is tax year end important?
History lesson to one side, it’s important that you’re aware of the 5 April deadline.
After this date, many of your annual tax allowances reset, including the amount you can contribute to an ISA, and how much you can earn in capital gains or dividends. This makes tax year end an important time for investors – it’s a period where you can make the most of your annual allowances, the benefits they come with (such as tax-efficient returns and government bonuses) and the positive impact they can have on your long-term investments.
Which products have annual allowances?
ISAs, Junior ISAs (JISA), Lifetime ISAs (LISA) and pensions are all subject to annual allowances. This means you can save or invest up to the annual allowance in a given tax year and there are tax benefits for doing so, although both the allowances and the tax benefits may be subject to change in the future.
A general investment account (GIA) does not have any allowance and any returns may be subject to dividend or capital gains tax – there’s more information on these tax allowances below.
^Here at Nutmeg, we don’t offer cash ISAs. But if you have a cash ISA with another provider, any contributions you make over the course of the year will still contribute to your overall allowance.
What is the annual allowance for an ISA?
This is the total amount you are allowed to put into ISAs in the 2022/23 tax year (this could change in later years.) So, whether you are investing in a stocks and shares ISA, a LISA, a cash ISA, or an innovative finance ISA, you have £20,000 to invest for that tax year without paying tax on the growth of those contributions.
You can invest into one of each type of ISA each year, but your cumulative contributions in ISAs must not be above £20,000.
What is the annual allowance for a LISA?
£4,000 (as part of your £20,000 ISA allowance).
This is the total amount you are allowed to put into a LISA for the 2022/23 tax year. The government will then add a further 25% for anything you add within a tax year. So, if you used up all your LISA allowance and added the full £4,000, the government would then add a further £1,000 (25%) to bring it up to a total of £5,000.
It’s important to remember that whatever you put into a LISA counts towards your total £20,000 allowance for ISAs for the year. If you put £4,000 in a LISA, you will have £16,000 left to contribute to other ISA types for that tax year.
You can read more about the LISA’s benefits for first-time buyers here.
What is the annual allowance for a JISA?
You are allowed to invest £9,000 per year for each child in a JISA without paying tax on the growth, and this does not affect your £20,000 ISA allowance as the money belongs to the child in whose name the JISA has been set up.
What is the annual allowance for pension?
£40,000 (kind of).
The government gives you a tax relief on your pension. This relief applies to 100% of your earnings, or the government set annual allowance which is currently £40,000 – whichever is lower.
So, if you saved £32,000 via regular pension contributions over one tax year, and assuming your income was at least £32,000, the government would top up your pension by 25% (£8,000). This is actually a 20% tax-relief because that £8,000 makes up 20% of your total pot of £40,000.
If you are a higher-rate taxpayer, you can claim a further 20% tax-relief and if you’re an additional-rate taxpayer, you can claim an extra 25% via your tax return.
Remember, your tax relief counts towards your total pension contributions and therefore affects your annual allowance. So, don’t forget to factor this in when you’re calculating how much to put into your pension each year.
If you’d like some help understanding how best to maximise your allowances, you can book a free call with one of our experts, who’d be happy to help.
Unlike an ISA, you can still contribute as much as you want beyond the pension allowance, but you’ll be eligible to pay tax on any amount over the contribution limit. This is called an ‘annual allowance charge’, and it will be added to the rest of your taxable income for the year when your tax liability is calculated. You may also be able to carry forward any unused allowance from the previous three years.
It’s also worth noting that if your pension reaches more than the pension lifetime allowance of £1,073,100 (this limit is frozen until 2026 after which it may change), you may be subject to a tax charge.
What is the annual allowance for a GIA?
GIAs are not designed with tax protection in mind, any income you earn from them is subject to tax. That’s why investors often use up all of their annual ISA allowance first. Once you’ve reached your ISA limit for the tax year then a GIA is a good way to invest beyond that, though your GIA returns may then be taxed.
What happens if I miss the end of the tax year deadline?
Most of your tax allowances will reset at the end of the tax year and any unused portion of your allowance can’t be used in the new tax year. Therefore, if you have money that you are planning on putting away into an ISA, Lifetime ISA or Junior ISA, you may want to do this before the deadline. Pensions are the exception to this, where you may be able to carry forward some of your unused pension allowance into the new tax year.
What happens at the end of the tax year?
After the deadline, the new tax year begins and your allowances reset. This means you can continue investing into the same ISAs from last year, and open new ISAs as well. But don’t forget, you can only open and pay into one ISA of each type per tax year.
How much tax do investors pay?
It depends which wrapper you are using.
If you invest in an ISA using the annual allowance, returns are not subject to tax.
If you invest in a General Investment Account or a different vehicle, you could be subject to Capital Gains Tax, Dividend Tax, or Stamp Duty on shares.
Capital Gains Tax (CGT)
If you invest outside of an ISA, you could be subject to CGT on any capital gains you make. Capital gains are the profits you make when you sell or dispose of an asset like stocks and shares, a second home, a painting, or a business. CGT is paid only on the increase in value of the asset you’re selling, not the overall value of the asset.
Everyone has an annual CGT allowance, and you can make capital gains up to this threshold without having to pay CGT. For the 2022/23 tax year, the annual CGT allowance is £12,300. For the 2023/24 tax year, the allowance will more than halve, falling to £6,000. In 2024/25, it will fall again to £3,000.
You do not pay tax on any dividend income that falls within your personal allowance, or on dividends from shares in an ISA or a pension.
You can receive dividends up to the annual dividend allowance without having to pay tax. The annual allowance for the 2022/23 tax year is £2,000. It will halve in 2023/24 and halve again in 2024/25.
How much dividend tax you pay depends on your Income Tax band. If you are a basic rate taxpayer, your dividend tax rate is 8.75%. If you’re a higher rate taxpayer, it’s 33.75%. If you’re an additional rate taxpayer, it’s 39.35%.
If you’re investing outside of an ISA or a pension, when you buy shares, you may need to pay a transaction charge of 0.5%. If you buy shares electronically, you pay Stamp Duty Reserve Tax (SDRT). If you use a stock transfer form, you pay Stamp Duty if the transaction is over £1,000.
You only pay tax on certain kinds of shares. To find out which shares are liable for Stamp Duty, click here.
It can be hard to keep on top of your potential tax liabilities, particularly when the rules are changed or updated. Our team of experts can help you navigate the various tax allowances, understand your liabilities, and give you clarity and peace of mind. Book a free call today.
How did the 2022 Autumn Statement impact investors?
The Autumn statement made a number of changes to taxation that could impact investors.
- The personal allowance was frozen at £12,570, increasing tax liability for those making withdrawals from a private pension
- The income tax additional rate threshold was reduced, which will mean more of the highest earners are subject to the 45p tax rate. All investors, whichever their tax bracket, should consider making full use of the tax allowances available, including pension and ISA allowances
- The Capital Gains Tax threshold will be more than halved for the 2023/24 tax year, and halved again for the 2024/25 tax year, prompting more investors to consider prioritising tax-efficient investment vehicles like ISAs and pensions
- The dividend tax allowance will be halved from £2,000 to £1,000 for the 2023/24 tax year, then will be halved again to £500 in 2024/25, which could impact investors who own shares or receive dividends outside of a tax wrapper
You can read about the changes in depth here.
How does tax year end differ if you’re self-employed?
If you are self-employed, you’ll need to file an online Self Assessment tax return and pay any tax you owe by 31 January. You can claim additional tax relief on money you put into a private pension –20% of any income you have paid 40% tax on, and 25% of any income you have paid 45% tax on.
You’re still entitled to the £20,000 annual ISA allowance.
Summary: what should I do before tax year end?
As the tax year end approaches, there are a few things investors should have on their checklist.
- Review your contributions into your ISAs or pensions this year, and check how much allowance you have remaining
- Consider whether you’d like to top up your ISAs or pensions. You don’t have to maximise the allowance for it to make a difference: the more you have invested, the more you can benefit from compound growth and not having to pay tax on any returns. The rising cost of living is tightening everyone’s belts, and shortening the time horizon with which we’re able to think about the future. But that doesn’t mean you have to stop saving towards your goals – a little top up now could make a sizeable difference over time.
- Consider ‘drip feeding’ future contributions. If you have money to invest, but aren’t ready to put it into the markets all at once, our 100% cash pot feature allows you to use your ISA allowance this side of the tax year in a cash pot, and then invest it when you’re ready.
- Ask for help if you need it. The tax year end can be a busy time, and tax can be complicated. Our mission at Nutmeg is to make investing as easy, accessible, and transparent as possible. If you need a helping hand, or would like to speak to someone, our friendly team of experts are here.
I’m still not sure about tax year end
Whether you’re an experienced investor or just looking to begin your investment journey, our team of experts are on hand to guide you through the end of the tax year and any other questions you might have.
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.
A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.
A stocks and shares Lifetime ISA may not be right for everyone. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So, you may get back less than you put in. Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer contributions.
To open a Nutmeg JISA, your child must be under the age of 16 and funds cannot be withdrawn until your child turns 18. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a Junior ISA is the right choice for you and your child, please seek financial advice.