By Pamela Phillips.
With the end of the tax year a fortnight away, it may seem too late to think about making your finances more tax efficient. But there’s still time to employ some effective tax tactics.
With a five-year freeze to many allowances announced at the last Spring Budget, it’s important that households use their tax exemptions efficiently and comprehensively.
Here we look at five steps you can still implement before 5 April which will help to reduce tax liability and protect wealth.
1. Use your annual pensions allowances
Nothing beats pensions when it comes to tax perks, with contributions attracting tax relief at your marginal income tax rate. This means a 40% income taxpayer can get £10,000 of pension at a net cost of just £6,000, once the tax reliefs are factored in.
‘If you have not hit your annual £40,000 pension contribution allowance, then consider using any spare funds to take advantage of the generous tax reliefs on offer. But keep an eye on your lifetime allowance too.’
You can also carry forward unused annual allowances from the last three tax years, to add an even larger lump sum into your pot – although the total contribution over the tax year is still subject to the limit that it cannot exceed your annual gross earnings.
Currently, you are about to lose the option of using unused allowance from the tax year 2018-19. It may be that you maxed out the allowances in the following two tax years – so is it worth using this allowance before it disappears for good?
2. Use – or lose - your Individual Savings Account (ISA) allowances
Up to £20,000 per adult can be subscribed to an ISA before midnight on 5 April, with all returns generated within it sheltered from future taxation. Hollands stresses: ‘If you are unsure of where to invest, you can fund your ISA initially with cash between now and then to use up any of the allowance that remains. Investments do not have to be purchased before then.’
Payments into a Lifetime ISA (LISA) - available to those under 40 - come out of your overall ISA allowance. But the generous government top-up means that for some savers – like those building up a deposit to purchase their first home – using up the annual £4,000 limit may well be worthwhile.
3. Start saving for children
Early saving at or soon after the birth of a child is a powerful tool that can generate big pots by the time they reach adulthood, The Junior ISA allowance is a generous £9,000 a year.
Moreover, even those who are not paying tax are entitled to tax relief on pension contributions of £2,880 a year (which the top-up takes to £3,600), the so-called ‘basic amount’. This means a pension with tax benefits can be opened for a child of any age – or indeed a non-earning spouse.
4. Be strategic with capital gains
Regular disposals of investments each year to take advantage of the annual capital gains tax (CGT) exemption can protect you against a hefty future CGT bill when you come to dispose of an investment, the profits on which might take you over the annual £12,300 allowance.
This tactic can also be used to transfer investments that are held outside an ISA into one by the process called ‘Bed and ISA’. But take action quickly as funds will need to be sold down to cash and moved into the ISA before 5 April and this can take a few days to clear.
Equally, it might be beneficial to crystallise some losses by making a disposal of poorly performing assets to bring the year’s overall capital gains down below the annual allowance.
If you are married or in a civil partnership, then inter-spousal transfers can be used to make sure both partners’ allowances are used optimally. When shares, for instance, are transferred from one spouse to another, it is assumed they are given at cost value and therefore do not trigger a tax liability. The CGT allowance for that year of the spouse who receives the transfer then comes into play.
5. Gifts to reduce inheritance tax liability
There are a number of tax-free financial gifts that you can make each year. These leave your estate immediately so there will not be any inheritance tax to pay. These include:
- gifts to a civil partner, husband, or wife (if their permanent home is in the UK);
- up to £3,000 in gifts each tax year. This can be carried over for one year giving a total of £6,000;
- an unlimited number of gifts up to £250 per person; and
- wedding gifts to a child of up to £5,000, to a grandchild or great-grandchild of up to £2,500, or to anybody else of up to £1,000.
The gifting rule noted above allows married couples and civil partners to transfer assets such as cash and investments between them, without giving rise to any tax liabilities, creating numerous opportunities to maximise the use of two sets of tax allowances.
If you have any questions at all regarding anything above please contact us - we're always happy to help!