We commonly think of each year ending on December 31st, however the UK tax year, often referred to as the financial year, ends on April 5th.
The end of the tax year is important for investors because after this date you are no longer able to put money into your tax-free allocations from the previous year.
You have £20,000 per year to invest in ISAs tax free (although this may be subject to change in the future).
So – if you don’t invest all your £20,000 in time, and have cash to invest, then next year you may need to go over your tax-free allowance and that additional amount will not enjoy the tax benefits of an ISA.
Understanding these allowances so you can plan your investments – such as whether to invest more this year or wait for the new tax year – is really important as an investor because it can have a big impact on the tax efficiency of your portfolio.
When it comes to investing for a long-term life goal such as retirement, your compound returns can be critical: You want to make sure your money is growing by seeing returns on your returns. If you are subject to income tax or capital gains tax on your investments, then this can eat into your growth and reducing the subsequent compound returns, effectively increasing the amount you lose as a result. By the time you get to retirement age that could be the difference of several years until you can stop working.
Which products have tax-free allowances?
A general investment account (GIA) does not have any tax-free allowance and everything within it can be taxed.
What is the tax-free allowance for an ISA?
This is the total amount you are allowed to put into ISAs for the 2020/21 tax year. 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 tax-free for that tax year. You may invest in one of each different respective ISA per year but your cumulative investments in ISAs must not be above £20,000.
What is the tax-free allowance for a LISA?
£4,000 (as part of your £20,000 for ISAs allowance)
This is the total amount you are allowed to put into a LISA for the 2020/21 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.
What is important to remember is that whatever you put into a LISA counts towards your total £20,000 allowance for ISAs. If you put in £4,000 you will have £16,000 left to invest in other ISA vehicles for that tax year.
What is the tax-free allowance for a JISA?
You are allowed to invest £9,000 per year for each child in a JISA tax–free, 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 tax-free allowance for a pension?
£40,000 (kind of)
The government actually 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%.
If you live in Scotland the tax relief rates work differently.
Remember: your tax relief counts towards your total pension contributions and therefore affects your annual tax-free allowance. So, don’t forget to factor this in when you’re calculating how much to put into your pension each year.
Unlike an ISA, you can still contribute as much as you want beyond the tax-free allowance. You can also 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, you may be subject to a tax charge. This figure is subject to change year on year.
What is the tax-free allowance for a GIA?
GIAs are not designed with tax breaks in mind, any income you earn from them is subject to tax. That’s why investors often use up all their tax-free ISA allowance investments 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 are the tax year end deadlines for me to make sure everything is in order?
You must make sure everything is in order before April 5th. For the 2020/21 tax year end the last working day is April 1st so this is the date you should be working towards.
If you have a Nutmeg account you can check all our payment deadlines, extended working hours and other key dates here.
What happens if I miss the end of the tax year deadline?
Unlike the self-assessment tax deadline you won’t get a fine from HMRC. However, your investments may be subject to tax if they are over the tax-free thresholds – having gone into a taxable GIA rather than an ISA. As an investor also of concern is the opportunity you will have missed if you haven’t maximised your tax-free allowance because you are missing the chance to make the most of your investment potential.
I’m still not sure about tax year end
Whether you’re an experienced investor or just looking to begin your investment journey, you can speak to the Nutmeg client services team who will be 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. 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 treatments apply 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.
A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.
A 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-matched contributions. If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.
A general investment account may not be right for everyone and tax rules may change in the future. If you are unsure if it is the right choice for you, please seek financial advice.