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Tax year end: What allowances will reset in April?

Category: Investments & Savings

The tax year end is approaching, and some allowances will reset on 6th April 2020. As this falls on a Monday, you need to take the necessary steps on or before Friday 3rd April. If you’ve yet to consider whether you’ve made full use of them or how they fit into your financial plan, now is the time to do so.

There are six key areas to review as you assess if you’re ready for tax year end.

1. Top up your ISA

When it comes to saving and investing, an ISA (Individual Savings Account) is one of the tools for reducing tax liability. Each tax year, you can deposit up to £20,000 into either a single ISA or spread across multiple accounts. If you’ve not already used your 2019/20 allowance, you may want to consider topping up your accounts.

If you don’t use your ISA allowance, it will be lost as it cannot be carried forward.

There are two main types of ISA. The first is a Cash ISA, where your deposits will benefit from interest, which is tax-free. The second is a Stocks and Shares ISA, where your money is invested with the potential to achieve returns, again, you won’t have to pay tax on profits. The tax advantages make ISAs an attractive way to save and invest for the long term.

2. Review pension contributions

How much has been added to your pension in the course of the current tax year? If you’re not sure, the approaching tax year end deadline is a good reason to check.

For the majority of people, a pension is the most appropriate way to save for retirement. One of the reasons for this is the tax relief received. This is given at the highest rate of Income Tax that you pay, so for basic rate taxpayers, an additional 20% will be added to your pension. For higher and additional rate taxpayers, the rate will be 40% and 45% respectively.

However, this is a limit to how much you can contribute to a pension and still receive tax relief. For those that have yet to access their pensions savings, this will usually be 100% of your annual earnings or the £40,000 annual allowance, whichever is lower. But if you earn more than £150,000, you’ll be subject to the tapered annual allowance, which can limit your tax-efficient contributions to as little as £10,000. If you’re unsure of how the tapered annual allowance affects you and what it means for your pension, please contact us.

If you’ve yet to make full use of your annual allowance, making an additional contribution can be beneficial for your long-term financial security. The annual allowance can be carried forward for up to three years.

3. Review plans to sell assets

If you sell certain assets and make a profit, Capital Gains Tax may be due. The assets it applies to may include investments not held in an ISA or a second property. Capital Gains Tax can be hefty and may be as high as 28%, depending on your Income Tax band and the type of asset, significantly eating into your profit.

Each tax year, individuals can make £12,000 that will be exempt from Capital Gains Tax. As a result, it’s important that you keep track of what assets you have sold and review your plans to dispose of assets too. For example, if you plan to sell shares that would deliver a profit of £20,000, splitting the sale across two or more tax years can help you keep more of it.

If unused, the allowance cannot be carried forward to 2020/21.

4. Make use of the dividend allowance

If you have investments that make dividend payments, you should also make use of the dividend allowance before tax year end. Dividends that fall under the allowance are tax-free. In addition to investors, company directors can also use this allowance to pay themselves from the business without having to pay tax. For the current tax year, the dividend allowance is £2,000.

5. Consider Inheritance Tax liability

Is your estate likely to be liable for Inheritance Tax? If your combined assets are worth more than £325,000, it’s worth looking at steps you can take to reduce liability.

One of the things you can do is give away assets to loved ones now, but not all assets are considered immediately outside of your estate for Inheritance Tax purposes, some will be included for up to seven years.

However, some gifts will be removed from your estate instantly. One of these is a gift of up to £3,000 known as the annual exemption. This gifting allowance can be carried forward for one year, so this is your last chance to use the allowance from 2018/19 if you haven’t already done so.

Other gifts that are immediately exempt from Inheritance Tax too. If this is an area of concern, speak to one of our financial advisers to leave as much of your wealth behind for loved ones.

6. Check marriage allowance eligibility

The marriage allowance also allows you to transfer a portion of your personal allowance to a spouse or civil partner. As a couple, it can help you reduce the amount of tax you pay on income.

The current personal allowance is £12,500. You can earn up to this amount without any income tax being due. If one partner earns less than the personal allowance, they can transfer up to £1,250 to their partner to reduce their tax bill. To be eligible the partner receiving the additional income must earn more than the other but less than £50,000 (£43,430 in Scotland).

The marriage allowance can be backdated to include any tax year since 2015/16 if you were eligible.

Planning ahead for 2020/21

Whilst the current tax year isn’t finished yet, it’s not too soon to start planning ahead for 2020/21. In fact, setting out your financial plan for the next twelve months can be beneficial.

Not only does it mean you can avoid making last-minute financial decisions, but it can also have monetary benefits too. Take your ISA allowance, for example. If you’re investing the money, drip-feeding deposits over the course of the year can help smooth out buying at the peaks and troughs of the market. Whilst if you’re using a Cash ISA, you’re earning interest over a longer period. Setting out how you’ll make use of allowances in 2020/21 now can boost your confidence in your plans.

If you’d like to discuss how tax-efficient allowances affect you, please get in touch. Whether you want to review allowances that will soon be reset or get a head start on the new tax year, we’re happy to help.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning.

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