The weeks leading up to 5th April, and the start of the new tax year, are when many people decide to get their finances into shape. Depending on your situation, a few simple steps could have a big impact on your wealth – and the wealth of your loved ones. If you’re trying to get your finances organized before the end of the tax year, here are a few tips to hopefully take the stress out of it.
Make the most of your ISA allowance
There really is a good reason to use as much of your ISA allowance as you can. In the current tax year, a maximum of £20,000 can be put away tax-efficiently across different types of ISAs: cash, stocks and shares, Innovative Finance and Lifetime ISAs. You’ll get another allowance in the next tax year, but your current allowance, or any unused portions of your allowance, won’t roll over.
Once in an ISA, you won’t need to pay tax on income or capital gains from your ISA investments, which you might have to do if you saved or invested that money in a different kind of account.
Set up or top up your pension
Setting up a pension might be easier than you think and, because pension contributions can benefit from tax relief, you could receive a little financial boost from the government even if you’re self-employed or not working at all.
If you have a ‘relief at source’ pension, as Nutmeg offer, your contribution is automatically topped up with an extra 25 per cent in the form of tax relief from the government. So, for example, an investment of £100 turns into £125 once in a pension. The extra money is effectively a refund of the basic rate tax you’re assumed to have already paid. If you’re a higher rate or additional rate taxpayer, the tax ‘refund’ is greater and you can claim back the difference on your tax return.
In the current tax year, you can potentially invest up to £40,000 in your pension. Unlike your ISA allowance, you can carry forward your pension allowance for up to three years provided certain conditions are met, but be aware that your pension contributions in a year aren’t allowed to exceed your yearly income or the £40,000 annual allowance, depending on which is lower. Some higher earners or those who have started to draw income from their pension have lower allowances, so it may be worth speaking to a financial adviser if you’re not sure which is the best approach for you.
Set up a Junior ISA
Invest up to the yearly maximum, currently £9,000, in a Junior ISA and help give the children in your life a generous gift when they turn 18.
University, a first car, a first home – young adults face a lot of expenses. You can help the children in your life pay these costs by investing money in a Junior ISA on their behalf. At 16, they can begin managing the Junior ISA themselves and, at 18, they can withdraw the money in their account if they choose.
The Junior ISA yearly allowance is like the adult ISA allowance – your child will get another allowance in the next tax year, but any unused allowance from this year won’t roll over into the new tax year. Depending on your Junior ISA provider, grandparents, family members and friends can also contribute to a Junior ISA, to help you use as much of this year’s allowance as possible.
It’s worth noting that the money in a Junior ISA belongs to the child and, except for a very few specific circumstances, can’t be withdrawn until the child turns 18.
Cut your capital gains tax by sharing
If your only substantial investments are in an ISA or pension, you may not have to worry about capital gains tax. But if you have other assets including, for example, company shares, a second home or valuable artworks, you should pay attention to your yearly capital gains tax allowance, which is currently £12,300.
You may be liable for capital gains tax if you sell or otherwise ‘dispose’ of assets at a profit. For this reason, it may be worth spreading the disposal of large assets over different tax years to stay within the threshold.
If you have a spouse or civil partner, you may be able to give assets to them without incurring capital gains tax, providing some conditions are met. That means they can effectively share their capital gains tax allowance with you.
Charitable donations are also eligible for tax relief. By signing a Gift Aid declaration, charities are able to claim an additional 25% from the government on top of your donation. As with pensions, higher rate and additional rate taxpayers are eligible for a larger tax refund, though you’ll have to add up what you’ve given over the year and declare it on your tax return. Services such as Just Giving should be able to show you a record of your donations.
One way to think about both charitable donations and pension contributions is that they reduce your adjusted net income, which is the portion of your income you must pay income tax on. For example, if you earn £60,000 and give £10,000 to charity (or to your pension), your adjusted income will fall to £50,000, just below the current upper limit of the basic rate tax band, which is £50,270.
Speak to a professional
If getting on top of your finances and ensuring you’re making the most of all the allowances available to you sounds like it’s too complicated or might be too time-consuming – don’t panic. You can also speak to a wealth manager or financial planner who will be able to assess your personal circumstances, understand your goals and help you with a plan to make the most of your money. Nutmeg has a team of experts that can help you review your financial strategy and investment goals, and make a plan that can turn your goals into reality.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future.
George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.