As the end of the financial year approaches, and the tax landscape is continually changing, we have put together this guide to ensure that you are making the most of the allowances and reliefs available.
Individual Savings Accounts (ISAs)
You can contribute up to £20,000 to your ISA in the current tax year. Your contribution can be allocated to cash, stocks and shares or a combination of both. Any income or gains generated by your ISA are completely free of tax, and you can withdraw money at any time. On death, an ISA can be passed to a spouse or civil partner, retaining the beneficial tax treatment.
If you have taken any money out of your ISA, you can replace it in the same tax year without using up any of your annual ISA allowance.
- You can also contribute to a Junior ISA (JISA) for your child. This offers the same tax-advantaged savings opportunity as an adult ISA, and the child will become entitled to the money at age 18. The annual contribution limit is £4,260.
- If you are saving to buy your first home, a Lifetime ISA (LISA) may be appropriate. You can contribute up to £4,000 per year, which the Government will top up by 25% (up to a maximum of £1,000). New LISAs are available to savers under the age of 40, and you can contribute until age 50. The proceeds must be used to buy a first home or to provide retirement benefits from age 60, otherwise a 25% penalty applies.
- Help to Buy ISAs are being phased out, but can still be opened until November 2019. You can contribute up to £1,200 in the first month and £200 per month thereafter. If you withdraw the money to buy a first home, the Government will add a 25% bonus, up to a maximum of £3,000.
Contributions must be made by 5th April 2019 otherwise you will lose your ISA allowance for the current year.
Pension contribution limits can be complex, but the main points are:
- Any UK resident under the age of 75 can contribute up to £2,880 per year to a pension and receive tax relief, taking the total gross contribution up to £3,600. This tax relief is also available to non-taxpayers, making it very attractive to fund pensions for spouses or children who are not in paid employment.
- Anyone with ‘relevant UK earnings’ (generally a salary from employment), can make a gross contribution up to the level of their income. This means that if you earn £30,000, you can contribute £24,000 to your pension, and this will be topped up to £30,000 with the addition of tax relief. Employer contributions may be paid in addition to this.
- An overall Annual Allowance of £40,000 applies (covering individual and employer contributions combined), meaning that if you earn £50,000, you can only receive tax relief on gross contributions of £40,000 per tax year (£32,000 net). However any unused allowance can be carried forward by up to three tax years.
- Investors with a total remuneration package of £150,000 or over may have a reduced Annual Allowance, as you lose £1 of Annual Allowance for every £2 over the threshold.
- Higher and additional rate taxpayers receive further relief on their pension contributions. For example, if your highest rate of tax is 40%, you will be credited with further tax relief of 20% when you submit your tax return, or by contacting HMRC. This means that a gross pension contribution of £1,000 only costs £600 out of net income.
- Salary sacrifice is an extremely efficient method of increasing your pension contributions, as all the tax calculations are done automatically by payroll. In addition, both you and your employer will save on National Insurance Contributions – some employers may agree to share this saving.
- If you earn over £100,000, your tax free personal allowance (£11,850 for 2018/2019) will be tapered at a rate of £1 for every £2 of income over the threshold. This results in an effective tax rate of around 60% on the band of income between £100,000 and £123,700. You can reduce your tax bill by making pension contributions to take your income under £100,000.
- If you take any taxable benefits from your pension (over and above your tax-free cash entitlement) you will trigger the Money Purchase Annual Allowance. Contributions will be restricted to £4,000 per year, and it will not be possible to carry forward unused allowances. It is recommended that you seek advice if you are looking to take pension benefits, particularly if you are still working.
Making a pension contribution before 5th April 2019 could reduce or eliminate your liability to higher/additional rate tax for 2018/2019. It is also your last chance to use up any unused Annual Allowance from 2015/2016, which is particularly useful if you are a higher earner.
Please note that while unused Annual Allowance may be carried forward, you must still have the relevant UK earnings to support the contributions. Therefore you can only benefit from carry forward if you are earning over £40,000 per year, or if your employer is making contributions on your behalf.
Maximise Your Income Allowances
As well as the tax-free personal allowance (£11,850), there are a number of other allowances that can be utilised before the end of the tax year to ensure that you draw your income as efficiently as possible:
- Personal Savings Allowance – this is the amount of interest that can be received before being subject to tax. The amount is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not receive this allowance.
- Starting Rate for Savings – interest of up to £5,000 may be paid free of tax, providing this forms part of your total income, which does not exceed £16,850. Allocating savings to a lower-earning spouse is a good way of taking advantage of this allowance.
- Marriage Allowance – a lower-earning spouse can transfer up to £1,190 of their tax-free personal allowance to their higher-earning partner, potentially reducing the family’s tax bill by up to £238.
- Dividend Allowance – dividends of up to £2,000 per year may be drawn (from your own company or from investments) without tax liability.
It is worth checking that your accounts and investments are allocated in the most efficient manner before 5th April 2019.
Charitable gifts are eligible for Gift Aid. This means that for every £80 donated, the charity receives £100 with the addition of tax relief. Higher and additional rate taxpayers may claim further tax relief.
- Gift Aid relief can be carried back to the previous tax year, providing this is included in your tax return for the relevant year. This means that you have a deadline of 31st January each year to allocate the gift to the previous tax year.
- Making charitable gifts can have the effect of preserving certain allowances, for example by keeping your income under £100,000 to retain your personal allowance.
You may wish to consider any gifts that you would like to make in the 2018/2019 tax year, although if you miss the 5th April deadline, you have the option to carry back.
Capital Gains Tax (CGT)
Each investor has an annual CGT exemption of £11,700 (as of 2018/2019). This is the amount of ‘gain’ that you can realise by selling investments before being subject to tax. It is worth using up this exemption each year, particularly on larger portfolios, as it avoids rolling up a substantial tax liability for the future.
Any gains realised that exceed your exemption will be subject to tax of 10% for basic rate taxpayers, and 20% for higher rate taxpayers, or where the gain pushes your income over the higher rate threshold. The rates are 18% and 28% for property investments.
- If you transfer assets to a spouse, this is ignored for CGT purposes, and you then have two exemptions (£23,400 in total) to set against gains.
- Any losses realised can be set against gains to reduce the overall liability. Losses can be carried forward from previous tax years.
- Any assets sold to realise a capital gain should not be re-purchased within 30 days, otherwise the transaction will be ineffective for tax purposes.
To make use of your capital gains exemption for 2018/2019, the assets must be sold by 5th April 2019. Transferring funds to your ISA or rebalancing your portfolio are useful strategies for using up your exemption without disrupting your investment strategy.
Inheritance Tax (IHT)
It is possible to gift up to £3,000 each tax year (£6,000 for a couple), and for this gift to be immediately outside your estate for IHT purposes. The exemption can be carried forward by up to one tax year.
- Smaller gifts of up to £250 per person do not count towards this allowance, nor do certain gifts in respect of special occasions like birthdays or weddings.
- Larger gifts may also be allowable, providing they are funded from income and a regular pattern of gifting is established.
- Where the gift is not immediately exempt, it will drop out of your estate after 7 complete tax years.
To ensure that your £3,000 exemption is utilised for 2018/2019 (and 2017/2018 if applicable), the gift must be made by 5th April 2019. It is important to keep a record of any gifts made.
Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs)
These are investments with the following characteristics:
- High-risk opportunity to invest in smaller companies
- Tax advantages apply
- In general, suitable only for high net worth, experienced investors who are prepared to invest for the long term.
Investing in this type of asset could reduce your tax bill by up to 30% of the investment amount (or 50% if the investment is made in a particularly high-risk version of the EIS). If a subscription is made by 5th April 2019, this could be set against your tax for 2018/2019, or in the case of the EIS only, could be applied to 2017/2018 if this is more beneficial.
This is a complex area and you should seek advice to determine if higher risk investments are likely to be suitable for you.
For property investors, the amount of mortgage interest that is eligible for higher rate tax relief is reducing. From 6th April 2019 only 25% of the interest will be subject to higher rate tax relief, reducing to 0% from 6th April 2020.
In advance of the new tax year, you may wish to consider repaying some of your debt, or allocating some of the rental to a lower-earning spouse to reduce the impact of these changes.
This guide is for information only, and should not be considered personal financial advice. Please speak to your adviser if you would like to take advantage of any of the tax planning opportunities available, or if you have any questions.