Seven allowances to use before the tax year-end
While the Government might be looking to fill their coffers by introducing a number of tax hikes (they've already committed to hiking national insurance), there are still some very generous tax allowances that haven't (yet) been touched by the Chancellor, which are worth taking advantage of before the tax year end, and perhaps even before the next Spring Statement. We take a look at seven of the most generous tax allowances that are worth taking advantage of today.
Individual Savings Accounts (ISAs)
Simple but effective, an ISA allows you to hold cash or investments in a tax-efficient way and the current annual allowance can protect £20,000 per individual. Growth, income and withdrawals are all tax-free and they can form a useful part of an accumulation strategy, building wealth for the future, or they can add flexibility and tax efficiency to a retirement income strategy. If you’re unsure whether the cash sitting in your savings account would be better off in a stocks and shares ISA, a cash ISA can allow you to secure the allowance in the current tax year and could be a stepping stone to a stocks and shares ISA in the new tax year. You’ll lose the allowance if you don’t use it and balances in cash ISAs can be moved into stocks and shares ISA in the future, when suitable.
Capital Gains Tax (CGT)
If your investments have made gains outside of a tax-wrapper, such as an ISA or pension, then you be may subject to CGT when you realise these gains. Managing these gains on an annual basis, can reduce the amount of tax you are ultimately liable to pay. Realising gains within your annual CGT exemption – £12,300 in the current tax year – could free up cash to make an ISA contribution. If one spouse has large gains, they might consider transferring assets to the other, enabling you to make use of two exemptions. Don’t forget, if you’ve made a loss and have no gains to offset in the same tax year, you can report that loss to HMRC, making it an ‘allowable loss’ and carry it forward to a future tax year.
Pension savings are a very tax-friendly way to save for the future. Tax relief is given on the way into the pension and there are national insurance savings too, if you use salary sacrifice to contribute into your company scheme. A tax-free element on withdrawals and the fact that money held in a pension is outside of your estate and not subject to inheritance tax either (under current rules, in most circumstances) makes them a fantastic vehicle for longer term savings. If you have earnings over £100,000, and you have lost some or all of your personal allowance, making an additional one-off personal contribution, could help you pay less tax by giving you some or all of your personal allowance back, in addition to the tax relief that contribution receives. If you’ve not made full use of previous years’ allowances, you might also be able to carry forward unused amounts and make a larger contribution in a year with higher earnings, or perhaps because you’ve received a bonus.
If you’re married or in a civil partnership and one of you has income below the personal allowance (usually £12,570), then you can transfer £1,260 of your personal allowance to your spouse or partner if they are a basic rate taxpayer. This doesn’t mean you both have to be ‘low earners’ to qualify, just that your household taxable income needs to be under £62,000 and this allowance could save you £252 a year. Other household income might be made up of cash withdrawals, ISA withdrawals or dividend income within the dividend allowance. Planning how to structure household income to take advantage of various smaller allowances certainly adds up to larger tax savings over the longer term, especially if a retirement income strategy is used over a 20-to-30-year period.
Annual gift exemption
Gifting out of regular excess income is a great way to gift regular amounts, without being subject to inheritance tax, but what if you don’t have any excess income and want to slowly gift smaller amounts of capital? The annual exemption for an individual allows for £3,000 to be gifted away without adding this to the value of your estate on death. This exemption can roll forward once, giving a couple who forgot to use their exemption last tax year, the opportunity to gift away £12,000 of capital in the current tax year.
If you pay tax above the basic rate, make sure to tick the ‘Gift Aid’ box and keep a record of your giving; you can then claim back the difference between the rate you pay and the basic rate on your donation.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)
VCT and EIS investments can offer investors the opportunity to claim income tax relief and/or CGT relief on amounts invested or future returns. They are higher risk, which is why the government offers tax relief, to encourage investment into companies and social enterprises that are not listed on a recognised stock exchange. If you have exhausted all of the other opportunities to reduce your tax bill and have excess funds having already invested in mainstream investments, your financial planner can advise you whether VCT and EIS investing might be suitable for you.
If you would like to discuss how you might make best use of the allowances available to you, please get in touch and we would be happy to help.
Tax rules are subject to change and taxation will vary depending on individual circumstances.