There are several ways you can make the most of annual allowances before the end of the tax year, but there are also some things you may want to avoid doing.
Your ISA annual allowance
Individual Savings Accounts (ISAs) enable you to invest without being subject to any tax on gains or income from investments, or on interest earned from savings accounts. While the introduction of several tax breaks in recent years may have lessened the appeal of these tax-free wrappers, they may still form a worthwhile part of an overall portfolio for some investors and might be a valuable tool in your long-term planning, though you should keep in mind that all of these rules can change.
Following the introduction of the Personal Savings Allowance (PSA) in April 2016, the majority of people no longer have to pay tax on savings income earned outside an ISA. The PSA amounts to a maximum of £1,000 a year if you’re a basic-rate taxpayer, with the limit falling to £500 if you’re a higher-rate taxpayer.1
In addition, there’s the dividend allowance, which means investors can receive £5,000 of dividends tax-free this tax year (2017-18), although this will be reduced from £5,000 to £2,000 in April 2018.
The dividend allowance and PSA do not diminish the appeal of ISAs for some investors, who may earn greater returns on their savings, and breach these allowances.
You also won’t pay Capital Gains Tax (CGT) on any investments you hold in an ISA. If you invest outside an ISA, any profits made above the annual CGT allowance, which for the 2017-18 tax year is £11,300, rising to £11,700 in the 2018-19 tax year, are subject to tax at 10% or 20% depending on your tax band.
Remember though, that there is always the risk of change, and both the PSA and dividend allowance, as well as the CGT and ISA allowance, could be increased, decreased or abolished over time.
If you do decide to use this year’s ISA allowance, you have until the end of the tax year on 5 April to do so, as it cannot be rolled over to the following tax year.
Topping up your pension
It may be worthwhile boosting your pension before the end of the tax year. If you’re employed and contribute to a company pension, check how much you’ve paid in. Remember that many employers will match contributions, up to a particular cap, so it’s worth taking advantage of this.
The more income tax you pay, the greater the tax relief on pension contributions. You receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions, to the extent that you are paying that much tax. For every £800 you pay in, the taxman will top it up to £1,000, while if you’re a higher or additional rate taxpayer you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your tax return, again provided that you are subject to higher rate tax on an equivalent sum to your contribution.
For most people tax relief is available on pension contributions of up to 100% of your income or £40,000. But check the rules.
Even if you don’t pay tax, you’re still entitled to receive basic rate tax relief on pension contributions. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you include the available tax relief.
If you’re self-employed or comfortable managing your own pension investments, you may have a Self-Invested Personal Pension (SIPP) or be considering opening a SIPP. Contributions into this benefit from tax relief, and you typically have a much wider choice of investments. It’s worth considering how you can take advantage of tax relief on pensions, whether you’re employed or self-employed.
Remember that you can’t access your pension savings until you reach the age of 55 (rising to 57 in 2028) and bear in mind that these pension tax rules can change in future too and that their effects on you will vary depending on your personal circumstances.
Remember your Capital Gains Tax allowance
You have an annual CGT allowance of £11,300 in the 2017-18 tax year, rising to £11,700 in the 2018-19 tax year. This means you can dispose of assets such as stocks and shares, property and other assets without having to pay any tax on the first £11,300 worth of gains. However, bear in mind you do not pay CGT on assets held in a pension, ISAs, or your main home.
You are unable to carry over one year’s CGT allowance to another. This means that if you are planning on selling shares that you are going to make, for example, £15,000 worth of gains from, you could make use of your CGT allowance by selling them in two batches, during this and the next tax year.2
If you report a loss, the amount is deducted from gains you made in the same tax year. You can deduct unused losses from previous tax years if your total taxable gain is still above the tax-free allowance. This is not available in a pension or ISA because CGT is not payable on assets held in ISAs and pensions.
Don’t open two of the same types of ISA in one tax year
ISA rules mean you can split your allowance, amounting to £20,000 in the 2017-18 tax year, across a combination of different types of ISA – for example, you may choose to open a cash ISA, investment ISA, peer-to-peer lending through the innovative finance ISA or up to £4,000 can be paid into a lifetime ISA. However, you are not able to open two of the same type of ISA, so you couldn’t pay into two cash ISAs within the same tax year, for example.
Remember that you can move your ISAs between cash, investments and innovative finance ISAs in the future, if you want, and you can also hold cash in an investment ISA. But, there are penalties if you take money out of a lifetime ISA other than for the permitted purposes.
Don’t assume you have to invest your ISA allowance in one go
If you would like to invest your £20,000 allowance for the current tax year into an Investment ISA, but haven’t yet chosen where to invest, you can hold cash in your account until you’ve made up your mind.
Gradually investing your allowance may be useful if, for example, you want to make investment decisions at a later stage, or perhaps you’re uncertain of market conditions, and would like to bide your time. Whatever your reasons, you don’t have to invest your ISA allowance in one go.
Don’t exceed the pension allowance
Your pension annual allowance is the amount that can be paid into a personal pension and which you can receive tax relief on each year – this currently stands at £40,000 a year, or 100% of your earnings – whichever is lower. You typically pay tax if savings in your pension pots go over this allowance.
Rules changed in April 2016 for adjusted earnings that are greater than £150,000. You lose £1 of allowance for every £2 you earn over £150,000, up to a maximum reduction of £30,000. If you earn £210,000 or more, your annual allowance falls to £10,000.3 Adjusted earnings include both personal and employer contributions. So, if you earn more than £110,000, known as your ‘threshold income’, and you contribute the full allowance of £40,000, you might be affected.
Anyone who has drawn more than their tax-free lump sum from their pension will have the amount that they can contribute to a pension reduced to £4,000 or 100% of earnings, whichever is lower, as their annual allowance is replaced by the Money Purchase Annual Allowance (MPAA).
As well as the Annual Allowance, there’s also a maximum total amount you can hold within all your pension funds without having to pay extra tax when you withdraw money from them, known as the Lifetime Allowance. This is £1m in the 2017-18 tax year, and £1,030,000 in the 2018-19 tax year.
Remember, the value of investments can fall as well as rise and you could get back less than you invest. Seek independent advice if you’re unsure of this investment’s suitability for you.