Each tax year, there are several tax allowances available which can be used to make the most of your financial plans.
Unused allowances can be lost – although you will have new allowances in the new tax year which starts on the 6th April.
Tax free saving for you and the family
An ISA is one of the most tax efficient ways you can save for the future. You have an allowance of £20,000 per tax year. ISAs protect your investments from Income Tax and Capital Gains Tax.
You have until 5th April to use up any remaining ISA allowance for this tax year. You can invest your ISA in a Stocks & Shares ISA, a Cash ISA or an Innovative Finance ISA. Cash ISAs currently offer low returns, so if you are looking for potential growth and willing to consider some investment risk, please ask your Origen adviser.
Don’t forget that other family members also have their ISA allowance, so if you have used your full ISA allowance you can make ISA contributions on their behalf.
The Lifetime ISA is available to people aged between 18 and 40 and offers a Government bonus of 25% when the funds are used for a first time property purchase up to the value of £450,000 or for retirement. Children have a Junior ISA allowance of £4,260 for this tax year (2018/19).
Saving for your retirement
Pension contributions receive tax relief. You can get tax relief on personal pension contributions up to 100% of your earned income up to an annual allowance of £40,000. Even if you are not earning, you can make pension contributions up to £2,880, which will receive basic rate tax relief of £720, to the maximum total contribution allowed of £3,600.
If you use all of your annual allowance in any tax year then you may be able to ‘carry forward’ and use any unused annual allowances from the previous three tax years, as long as you have been a member of a pension scheme in those years.
Your pension provider will claim tax relief for you at a rate of 20% and adds it to your pension pot (‘relief at source’) so a contribution of £80 will be boosted to £100. You receive relief at source on all personal and stakeholder pensions, and some workplace pensions. If you are a higher or additional rate taxpayer you can reclaim further tax relief on your annual tax return.
If you are a member of a company pension plan through auto-enrolment, you may also benefit from employer contributions. Your employer may deduct your workplace pension contributions from your pay before they are subject to Income Tax, providing pension tax relief on a ‘pay as you earn’ basis.
Generally, everyone has an annual allowance for each tax year for pension contributions of £40,000 however this allowance includes employer contributions and any increase in value for any defined benefit workplace pensions, which are based on salary and service.
Your annual allowance may be reduced if:
- you have already started to take flexible benefits from your pension fund, then your pension contributions allowance may be reduced to £4,000 in each tax year (called the ‘Money Purchase Annual Allowance’).
- If you have ‘threshold income’ exceeding £110,000 (broadly your total taxable income less any personal pension contributions) and ‘adjusted income’ of more than £150,000 (your total taxable income plus the value of employer pension contributions and increase in defined benefit pension), then your annual allowance will be reduced at the rate of £1 for every £2 over the £150,000. For example, if your adjusted income is £180,000 then your annual allowance will be £25,000 as you will lose £15,000 from the standard annual allowance.
You should also remember that there is a maximum amount, the Lifetime Allowance, that you can accumulate in pension funds over your lifetime. If you exceed this allowance, £1.03 million for the 2018/19 tax year, you may incur additional tax charges when you take your benefits.
Reducing your tax bill
Our advisers can help you to review your income and investments, helping to reduce your tax bill:
Income Tax – Making pension contributions reduces your taxable income, so you can benefit from saving more towards your retirement and reducing your Income Tax bill.
- Dividend Allowance – The tax-free allowance for dividends has fallen to £2,000, so you should consider transferring any assets which pay dividends into tax free investments, such as an ISA, to avoid having to pay tax on your dividends. For example, any direct ownership of shares or sharesave schemes can be subject to tax if you exceed the dividend allowance.
- Capital Gains Tax (CGT) – If you are a higher rate taxpayer, you may consider transferring assets to your spouse or civil partner if they are a basic rate or non-taxpayer. If you are likely to exceed your CGT allowance from cashing in gains, you should try to split the sale where possible across tax years so that you can utilise the CGT allowance in this tax year (£11,700) and the next tax year (£12,000) giving yourself an allowance of £23,700. Transferring assets to your spouse or civil partner will enable them to also use their CGT allowance giving a total allowance over the two tax years of £47,400.
- Inheritance Tax –Gifts from normal expenditure or up to £3,000 each tax year will be exempt from Inheritance Tax. Using these allowances can help you to reduce the value of your estate and these gifts can fund ISAs or pension plans for family members.
Our advisers keep an eye out for tax rule changes, so they can identify financial planning opportunities which may suit your circumstances. For example, Enterprise Investment Schemes and Venture Capital Trusts offer some Income Tax benefits; share investments on the Alternative Investment Market (AIM) can offer Inheritance Tax benefits. These investments are often higher risk and therefore may not be suitable for you, so it is important that you seek professional advice. We can review your circumstances and recommend actions for you to consider.
Ask your Origen adviser, or take a look at ‘The Origen Guide to Tax Year Planning’, to find out more about tax planning opportunities.
Taking action now before the new tax year means that you can benefit from the allowances for this tax year and also the new tax year from April 6th.
This article is for information only and is not to be taken as financial advice. This information is based on our understanding as at February 2019.
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