Making The Most of Your Tax Allowances for 2017/18
From savings to pensions and ISAs, we get you covered!
The end of tax year is just ‘round the bend - April 5th, to be precise - but if you’re quick, you can still make the most of your tax allowances and maximise your savings. Effective tax planning can save you thousands, but only if you time your investments and sell-offs correctly.
You may want to speak to a financial adviser! But since time is fast running out and they’re likely to be busy with existing clients, we wanted to get you all prepped out by compiling a tax year end checklist.
ISAs (Individual Saving Accounts)
You can shelter up to £20,000 this tax year in an ISA (stocks and shares ISA, cash ISA, Lifetime ISA, etc), where all income, capital gains and interest are tax-free. The lifetime ISA is worth mentioning: it has been launched to push savers beef up their savings towards a deposit for a first home or for retirement. The Government will basically pay you a 25% bonus (up to £1,000) for £4,000 saved a year and this over 32 years potentially.
Also remember that if you are married, you can maximise your ISA allowances by utilising your partner allowance too if she/he does not use it.
Don’t forget about the junior ISA for the kids: you can contribute up to £4,128 per child, and up to £2,880 towards their pension and get 20% tax relief (so it is topped up by the government to £3,600). By starting early, you will make the most of the impressive power of compounding interest.
Capital gain Tax Allowance
Each tax year nearly everyone who is liable to capital gain tax (“CGT”) gets an annual tax-free allowance of £11,300 - known as the “Annual Exempt Amount”. You only pay CGT if your overall gains for the tax year (after deducting any losses and applying for any reliefs) are above this amount. Happy with the performance of your investments? You may want to consider selling enough of your shares to use that allowance. This is a yearly allowance, and if you go above, you may have to pay up to 28% tax.
Personal Savings Allowance
You have a Personal Savings Allowance (“PSA”) of £1,000 or £500 for higher rate taxpayer. This means that you don’t pay taxes on your income from savings (on £1,000 of income from savings for basic taxpayers to £500 to higher rate taxpayers).
Pensions offer a tax efficient way to invest into your retirement - any contributions you make receive income tax relief at the highest marginal rate. Your annual allowance is the maximum that can be contributed to your pension every year based on your earnings and is capped at £40,000.
Even those that aren’t in employment can get tax relief on pension contributions - you can contribute up to £2,880, equivalent to £3,600 gross amount, to your spouse’s pension (or vice-versa).
Estate planning can involve a myriad complex issues, and you can take advantage of gifting to your spouse, family or friends to help reduce the value of your estate for Inheritance Tax purposes. You can gift up to £3,000 a year without incurring Inheritance Tax, and you can give away money to your children and your grandchildren when they get married.
Be aware that there might also be Capital Gains Tax to pay on assets that you give away; Inheritance Tax can be a tricky subject, so we recommend you check with an accountant or lawyer if you’re ever unsure.
Go! Remember, unused tax allowance don’t roll over into the new tax year - if you lose ‘em, they’re gone forever! And talk to your tax and financial adviser if you are unsure!