Making sure you use up any allowances you are entitled to is the first step to reducing the amount of tax you may be liable to pay. We’ve provided our ‘Top 5’ list of planning areas to consider before 5 April 2020. The rates given are correct for the 2019/20 tax year.
1. Your ISA allowance: don’t wait to use it
There are many different types of Individual Savings Account (ISA), including Lifetime ISAs, Junior ISAs and Innovative Finance ISAs, although the best known are Cash ISAs and Stocks & Shares ISAs.
If you invest your full allowance early on during each tax year rather than at the end, your money will have a longer time to potentially grow tax-efficiently. This can add up to extra money in your ISA if you invest the maximum £20,000 allowance. Of course, not everyone will be in a position to invest £20,000 every April – but the more you put in, and the earlier you do it, the better off you can be.
2. Top up your pension, but watch out for the lifetime allowance
Generally, the maximum amount that can be contributed tax-efficiently in total from all sources (for example, from you and your employer) each tax year is £40,000. Remember, to receive tax relief, your personal contributions can’t be any higher than your earnings (or £3,600 if more).
The lifetime allowance for most people is £1,055,000 in the tax year 2019/20. It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension. If you take any excess amount above the lifetime allowance as a lump sum, it will be taxed at 55% (or 25% if taken as income or placed in drawdown).
3. Make use of gift allowances (Inheritance Tax Planning)
If you have a potential Inheritance Tax liability, there are ways of reducing this by making exempt gifts that are immediately outside of your estate. You can give up to £250 a year to as many people as you like. You can also give away up to £3,000 tax-free a year (but not to those who have had the £250 gift). If you don’t use this annual exemption, it can be carried over for the following year, but only up to a maximum of £6,000. Gifts made at the time of a wedding or registered civil partnership are given tax-free allowances: £5,000 can be given to a child; £2,500 can be given to a grandchild or great grandchild; £1,000 can be given to anyone.
If you can show that regular gifts were funded out of surplus income, not savings, you won’t pay Inheritance Tax. But it’s a complicated matter to prove, and on your death your personal representatives will need to provide evidence of your incomings and outgoings to demonstrate that the gifts were paid for out of surplus income, not from savings or investments.
4. The personal allowance: how not to lose it
Everyone has a basic personal tax-free allowance. This is the amount of income you can receive tax-free each year. You do not normally need to do anything in order to receive this, as it should automatically be applied when you are paying tax. If you earn over £100,000, this will be reduced, but otherwise it is £12,500 (2019/20 tax year).
If you are married and have used up your personal allowance, but your partner has not, it may be beneficial to transfer some savings or other assets into their name, but you need to bear in mind they will then legally own those assets. Or you can make use of the Marriage Allowance, which allows 10% of a non-taxpayer’s personal allowance to be transferred to their basic-rate taxpaying spouse.
5. Don’t forget capital gains
The annual exemption is £12,000 for 2019/20. If you have unrealised gains, you may decide to dispose of some before the end of the tax year to use up your annual exemption. Married couples are taxed individually on capital gains, so transferring an asset from one spouse to another before realising a gain can be tax-efficient as long as the transfer represents a genuine gift from one to the other. As far as possible, it is important to use the annual exemption each tax year because, if unused, it cannot be carried forward.
When you sell a property that qualifies for the main residence tax relief, you do not have to pay Capital Gains Tax (CGT) on it. This main residence relief is extended for 18 months after you vacate the property. What this means is that you can sell your family home within a year-and-a-half of moving out of it and still qualify for the main residence relief (that is, pay no CGT).
1) A pension is a long-term investment.
2) The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
3) Pensions are not normally accessible until age 55. Your pension income could also be affected by 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.
4) The value of investments and income from them may go down. You may not get back the original amount invested.
5) Past performance is not a reliable indicator of future performance.
6) Any levels and bases of, and reliefs from, taxation are subject to change.