Don’t Get Lost in a Tax Maze

It’s that time of year again when we start looking at end of tax year planning (for those who haven’t already made the full use of their allowances).

With proposed changes coming down the line for pensions and inheritance tax, you could be forgiven for being a bit more confused and simply do nothing. So to help you feel a little bit less lost in the tax maze, here’s five essential tips to consider as the tax year comes to a close:

1. Make the Most Of Your ISA Allowances

Make sure to use as much of your full ISA allowance of £20,000 that you can. This is an opportunity to save money tax free. It can be into a Cash ISA – like  a bank account – or a Stocks & Shares ISA.

If you’re eligible, consider contributing to a Lifetime ISA (LISA) with a £4,000 allowance which will use up £4k of your £20k ISA Allowance. To find out more about what a Lifetime ISA is, here’s our handy guide.

And finally, if you have children or grandchildren, you can contribute up to £9,000 into a Junior ISA (JISA). Remember however, you can’t withdraw from this and it will automatically become there’s at age 18.

 

2. Pension Contributions

Contributing to your pension can provide significant tax benefits.

Here’s a few groups of people who might get even more benefits out of it now rather than solely being for the benefit of their retirement

• If you earn just over a tax bracket, eg. £50,000, a pension contribution can help reduce your income tax rate bringing you back to Basic Rate Tax only.
• If you (or your partner) claim child benefit and your income is between £60,000 and £80,000, a pension contribution will bring your adjusted earnings down, which could help you reduce your High Income Child Benefit Tax Charge, making you eligible for more child benefit.
• For those earning over £100,000 and claim childcare account benefits, a pension contribution can bring your earnings back below the £100,000 magic number. This could help avoid the tax trap.
• For anyone earning over £125k who pays the additional rate of tax, your personal contributions benefit from tax relief at your highest rate. So a if you contribute, £10k into a pension, the fund will reclaim tax to bring this up to £12,500. Then through your tax return, you will reclaim a further £3,125 of tax relief and so your total pension contribution of £12,500 cost you only £6,875.
• If you are a sole trader, self employed or in a partnership, a pension contribution will reduce your income tax liability for your self assessment next January.

3. State Pension Gaps

This is your last chance to buy any gaps in your state pension. I know we said this last year too, but then they extended the window for it.

Ensuring you have a full state pension can provide a valuable source of income in retirement. You can find out more here – https://www.gov.uk/voluntary-national-insurance-contributions 

Log on to your .gov.uk account (or use the HMRC which I actually quite useful) and check your state pension and NIC record. It will show you if there are missing or incomplete years and tell you how much you need to pay to get a full year. Depending on the years, a full year seems to cost between (£900-£1,000) but if you have par tpaid some of the year, it might not be anywhere near as much.

And don’t forget, you only need 35 years of full NIC Contributions, so if you have a few gaps form your time at university, it’s highly likely that you will make up for them during your working career so it shouldn’t be an issue.

If you’re in any doubt, please ask John or myself about this. It could be some of the best money you spend.

 

4. Annual Gift Allowance

Take advantage of the annual gift allowance of £3,000. This can help reduce the value of your estate for inheritance tax purposes.

Inheritance tax is front and centre right now for lots of people, so this gift allowance might be more useful now. You can use this year’s allowance and last year’s f you didn’t use it, so each person can make a gift of £6,000.

There are one of wedding gift allowances too and Normal Gifting where you gift out of excess income which can also be beneficial to clients with potential IHT issues.

 

5. Capital Gains Tax (CGT) Allowance

Make use of the CGT allowance of £3,000. This can help you minimize the tax you pay on any gains from the sale of assets or property. There is no tax between spouses, so you can split asset ownership in some cases, using both of your allowances.

However, if you are thinking of doing this with property, just check with your solicitor as the fee to switch ownership now might not make the saving of an additional allowance that worthwhile.

This allowance used to be much more beneficial when it was around £12k, but if you can, it is still worth using up.

 

ISA, Pension, Personal financial planning, strategy, tax