Whether you are new to the world of investing, or someone who has been putting their money to work for many years, all of us in the UK are subject to the same calendar tax year that runs from 6 April to 5 April the following year.
This somewhat odd choice of date differs from most of 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.
History lesson to one side, it’s vitally important that you’re aware of the 5 April deadline and what it could mean for your financial plans. This is important for investors because after this date you are no longer able to put money into your ISA allocations from the previous year.
You have £20,000 per year to invest in ISAs without paying tax on the growth of those contributions (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 ISA allowance and that additional amount will not enjoy the tax benefits of an ISA.
Understanding these allowances so you can plan when and how you invest is vital 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 in ensuring your money is growing by getting returns on your returns over time. If you are subject to income tax or capital gains tax on your investments, then this can eat into your growth and reduce 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 annual allowances?
A general investment account (GIA) does not have any allowance and everything within it can be taxed.
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 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 annual 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 2021/22 tax year. The UK 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 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 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%.
Remember: your tax relief counts towards your total pension contributions and therefore affects your annual ISA 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 pension allowance however 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 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 (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 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?
You are missing the opportunity to take advantage of the returns that come together with maximising the use of the different ISA allowances. If you do not use the allowances your investments may be subject to tax since you would have invested in a taxable GIA rather than an ISA.
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.
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.
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 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.