The end and start of the tax year: 10 tips to help you plan
1) Maximise pension contributions
There are a number of reasons why people should look to maximise pension contributions in the current and next tax year:
- Higher earners could face a reduction in their annual allowance to as little as £10,000 and so should look to utilise their higher annual allowance, or any carry forward entitlement, while they are still available
- Some people can protect their personal income tax allowance or child benefit entitlement by making additional pension contributions
- For higher and additional rate taxpayers, we don’t know how much longer higher rates of tax relief will be available.
2) Applying for pension protection
From 6 April 2016, the pension Lifetime Allowance will be reduced from £1.25m to £1m. This means those with larger pension pots could face an additional tax penalty.
It might be possible to reduce or avoid any tax bill by applying for Fixed Protection 2016 or Individual Protection 2016. However, while those applying for Fixed Protection can retain a Lifetime Allowance of £1.25m, this protection is lost if they make any further pension contributions from 6 April.
3) Be wary of taking money out of your pension
If you don’t need the money in your pension now, it is probably best to leave it where it is. Those who are withdrawing money using the pension freedoms need to be wary of taking too much too soon and potentially facing a larger tax bill. They need to carefully plan how and when they will take any money from their pension.
4) Maximise ISA contributions
The annual ISA allowance for the current tax year is £15,240. Any amounts which are unused are then lost and so it could make sense to top up your ISA investments now. It could also be sensible to maximise ISA contributions for the next tax year as early as possible as your investments will benefit from tax efficient growth and/or income straight away.
5) Dividend Allowance
From 6 April, the new Dividend Allowance will mean that everybody can receive up to £5,000 of tax free dividend income each year. This will provide planning opportunities for many investors, although those with larger portfolios outside of tax efficient wrappers and those who are paid in part or full through dividends could face a larger tax bill.
6) Personal Savings Allowance
From 6 April, a tax-free Personal Savings Allowance will be introduced for savings income and interest. A basic rate taxpayer will be able to receive up to £1,000 per year, and a higher rate taxpayer up to £500, each year with no tax liability. Alongside this, banks, building societies and NS&I will pay interest with no tax deducted. This new allowance could mean cash ISAs are no longer the default choice for some people’s cash savings, especially if the interest rates they offer are uncompetitive.
7) Realising capital gains
Those who have made capital gains with their investment portfolios outside of tax efficient wrappers, or other assets, could consider realising some gains before the end of the tax year to utilise their annual capital gains tax allowance of £11,100. This allowance can’t be carried forwards if it is unused.
Spouses and civil partners both have an annual capital gains tax allowance and so could protect up to £22,200 of gains between them each tax year, especially as assets can be transferred between them on a no-gain, no-loss basis.
8) Inheritance tax gifts
Consider making use of the inheritance tax gift allowances in the current and next tax year. The £3,000 annual exemption can be carried forward for one year, but any unused allowances prior to this are lost. There are other gift exemptions which can be utilised including the £250 small gifts exemption where gifts up to this amount can be made to an unlimited number of people.
9) Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes
You can benefit from tax reliefs on investments of up to £200,000 each year in Venture Capital Trusts, £1m each year into Enterprise Investment Schemes and £100,000 each year into Seed Enterprise Investment Schemes.
While this might sound attractive, all of these are high risk investments and so are only suitable for those with large investment portfolios who understand and accept the risks involved.
10) Take Independent Financial Advice
Tax rules and regulations can be very complicated. While there are some basic steps which many people can take, such as investing into a company pension scheme or contributing to an ISA, if you have large investment amounts, high earnings or complex financial arrangements, you should take independent financial advice.
Patrick Connolly is a certified financial planner at Chase de Vere