Planning for the tax year-end

In uncertain times it’s easy to let concern about what’s going on in the world cloud your judgement. The risk is that you delay the actions that can help you achieve financial security for yourself and your family. That includes taking advantage of the valuable tax breaks offered each tax year.

How much tax do you want to pay on your investments? Is your pension planning on track to provide the retirement lifestyle you would like? How much of your wealth do you want to pass on to your family free of Inheritance Tax? It’s in your control.

Whether it’s planning your investments or your legacy, now is the time to act before the tax year-end deadline on 5 April.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

INDIVIDUAL SAVINGS ACCOUNT (ISA)

Your annual ISA allowance remains one of the simplest, most flexible and popular ways to invest for your future and shelter money from Income Tax and Capital Gains Tax. In the video below, Lauren Smith, Investment Analyst, discusses the different types of ISAs available.

KEY POINTS TO CONSIDER

Your contribution limit

Individuals who are 18 or over can invest up to £20,000 in an ISA this tax year.

Child’s allowance

A Junior ISA allowance of £4,368 this tax year is available for those who are under 18.

Tax boost

Returns from an ISA are free of Income Tax and Capital Gains Tax.

Use it or lose it

You cannot carry forward your allowance, so this year’s will be lost if it is not used.

Don’t delay

The contribution deadline for this tax year is: 5 April 2020.

Why choose a Stocks & Shares ISA?

Holding wealth in cash is the right thing to do if it’s money you might need in the short term. And it’s entirely understandable that savers look to cash for security when markets are volatile. The problem comes when cash becomes a long-term investment. If the returns on your cash aren’t keeping up with inflation, then your spending power is reducing.

In 2017/18, 10.8 million adult ISA accounts were subscribed to. Whilst the number of Cash ISA subscriptions fell by 697,000, the number subscribing to Stocks & Shares ISAs rose by 246,0001; which suggests that more savers are realising their ISA allowance could be working harder for them to create tax-efficient capital growth and income for the future.

The maximum you can save into an ISA in this tax year is £20,000, but any unused allowance is lost after 5 April. It’s a valuable opportunity to grow your wealth and protect it from the twin threats of taxation and inflation. But to make the most of it, you need to invest it wisely.

¹ HMRC, 'Individual Savings Accounts (ISA) statistics', April 2019

A Stocks and Shares ISA will not provide the security of capital associated with a Cash ISA.

Retirement planning

Due to greater simplicity, choice and flexibility, pensions are a more attractive option for retirement savers than ever before. What’s more, the tax incentives are hard to beat. In the video below, Andrew Shaw, Head of Investment Communications, discusses the main benefits of a pension.

Subject to limits on how much you can contribute, for every 80p you pay into a pension plan, the government adds 20p, boosting it to a total contribution of £1. However, higher and additional rate taxpayers can claim extra tax relief through their annual tax return, meaning that a £1 pension contribution can effectively cost them just 60p and 55p respectively.

These tax breaks are so advantageous that they will inevitably remain under government scrutiny; and for this reason, change cannot be ruled out in the future. You should therefore try to take advantage of the existing reliefs by making full use of your annual allowance.

The annual allowance is a limit on the tax-free pension savings you can make in a tax year. By maximising this year’s allowance and carrying forward any unclaimed allowances from the three previous tax years, you can benefit from current rates of tax relief and potentially enjoy a higher income when you stop work.

Those who don’t take advantage of this opportunity by 5 April could lose out on significant tax relief benefits in the future.

KEY POINTS TO CONSIDER

Your contribution limit

Most people get tax relief on pension contributions worth up to 100% of their earnings, capped at £40,000 each tax year. This is called the ‘annual allowance’.*

Carry it forward

If you don’t use all your allowance in one year, you can ‘carry it forward’ for up to three years.

The opportunity to carry forward your allowance from 2016/17 will be lost after 5 April 2020.

Turning 75?

You will no longer qualify for tax relief on pension contributions.

Don’t delay

The contribution deadline for this tax year is: 5 April 2020.

*For additional rate tax payers with net income of £110,000 or more, a ‘tapered annual allowance’ applies.

Tax and estate planning

Inheritance Tax (IHT) is widely viewed as unfair, but only effective and early planning can minimise its impact on your estate.

A record £5.3 billion in IHT was collected in the 2018/19 tax year, and the Office for Budget Responsibility forecasts that receipts will increase to £6.3 billion by 2023/24.¹ Yet IHT is often referred to as a ‘voluntary tax’; the fact is that ignorance and inertia are largely to blame for wealth ending up in the hands of HMRC rather than the family.

Estimate how much IHT may be due on your estate by using our calculator.

The good news is there are plenty of things you can do to keep any potential IHT tax bill to a minimum; although with the end of the tax year looming, you only have a short window of opportunity to use allowances that might be changed in any forthcoming budget.

1 Office for Budget Responsibility, April 2019

KEY POINTS TO CONSIDER

Your gifting allowance

You can give away up to £3,000 each tax year IHT-free.

Carry it forward

You can make use of any unused gifting allowance from the previous tax year.

Double up

Using this and last year’s allowance, a couple could potentially remove £12,000 from their joint estate before 5 April.

Don’t delay

The last opportunity to utilise any unused gifting allowance is 5 April 2020.

Tax year-end checklist

Here are ten ideas to consider to help ensure you make the most of your tax allowances and exemptions before 5 April.

  1. Make use of your ISA allowance of £20,000.
  2. Check your spouse or partner has maximised their ISA allowance to fully utilise the combined allowance of £40,000. 
  3. Make contributions of up to £4,368 per child into Junior ISAs to help them get a head start. 
  4. Those wishing to maximise pension saving should consider fully utilising their annual allowance. Unused allowances can be carried forward, but only from the three previous tax years. If your 2019/20 allowance is fully utilised, you should review whether you have any unused allowances from the 2016/17 tax year first. 
  5. High-earners could take steps to bring their taxable income down by making pension contributions or charitable donations. These can help individuals:
    • Bring their income to below the additional rate tax band, which starts at £150,000.
    • Regain their Personal Allowance, which starts to be withdrawn for incomes over £100,000.
    • Avoid losing Child Benefit, which is gradually removed if one parent in the household earns more than £50,000
  6. Take advantage of your annual Capital Gains Tax exemption by realising gains of £12,000 in this tax year. Those with larger gains might look to take them over two tax years and make use of tax-free, inter-spouse transfers.
  7. Use your IHT gifting exemption of £3,000 for this year. 
  8. If you’re thinking of making a large pension withdrawal, it could make sense to spread the withdrawal over two or more tax years to minimise your Income Tax liability.
  9. If you own a business and depending on your earnings, consider taking dividend income instead of salary to avoid National Insurance contributions (NICs). The first £2,000 of dividend income is tax-free.
  10. Divert your company’s pre-tax profits into a personal pension to reduce your company’s liability to Corporation Tax, Income Tax (including on dividends) and NICs. Contributions will need to be paid before your company’s financial year-end in order for the business to qualify for the deduction in that accounting period. In many cases, that deadline will be 31 March 2020.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

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