Three things to do before the tax year ends
By Julia Magnay, Compass Financial Management
Easter is nearly with us and just a few days after that, on Thursday 5th April, the tax year ends. You’ve worked hard for your money all year so now is the time to eat some chocolate and review your finances to make sure that your money is working as hard as possible for you in return. Here are three things to consider doing before the end of the tax year.
Use your ISA Allowance
Each tax year you have an ISA Allowance, and for tax year 2017/2018 it is £20,000. You can choose how you split this – you can put the full amount into a Stocks & Shares ISA or into a Cash ISA, or you can split the total between one of each type. Every year the ISA Allowance lets you build a significant portfolio of assets sheltered from tax. The interest on a Cash ISA isn’t taxed, and with a Stocks & Shares ISA all gains are free from Capital Gains Tax, and you don’t have to declare your ISA investments to the taxman. If you don’t use your ISA Allowance you can’t make up the shortfall later – that year’s allowance is lost forever – so it is worth considering using your allowance if it fits with your financial circumstances.
Make Pension Contributions
Your retirement could be the longest paid holiday of your life, or your longest period of unemployment. If you’d prefer the holiday option then a pension is a good place to start and, what’s more, paying into a pension can be very tax efficient. Personal pension contributions benefit from tax relief at your marginal rate of tax. What does that mean? Well, here’s an example to explain. For £10,000 to end up in your pension this will only cost you £8,000 if you are a basic rate taxpayer, £6,000 if you pay higher rate tax and £5,500 if you’re an additional rate taxpayer.
The pension contribution is paid net of basic rate tax (i.e. you pay in 80%, or £8,000 in the above example) and then higher and additional rate relief is reclaimed through self-assessment.
As well as individuals making contributions, companies can also pay into an employee’s pension so if you are a director of a limited company your company can pay into your pension. This contribution won’t receive tax relief but the amount paid in can be offset against your company’s profits and reduce the corporation tax payable.
There are limits on the amount of tax relief that is available. This can be a bit complex so it is worth talking through your personal situation with your accountant and financial adviser but I’ll give a rough guide. The first limit of tax relievable contributions is your annual earnings, the second is the Annual Allowance which is £40,000 for this tax year. However you may be able to pay in a substantial amount more this tax year due to being able to carry forward the 3 previous years’ allowances.
Use your Capital Gains Allowance
This is a very under used allowance but can be used very effectively in financial and tax planning. Everyone has an annual Capital Gains Tax (CGT) allowance, this year it is £11,300. This means that you can dispose of assets, such as property and stocks and shares, without having to pay tax on the first £11,300 of gains. This allowance, similar to the ISA allowance, can’t be carried over into another year so if you plan to sell an asset which will give a gain of over £11,300 you could use this year’s allowance before 6th April and use next year’s allowance the other side of the tax year end. If a couple has joint assets that will create a gain and they are married or in a civil partnership they could consider sharing out the assets so they can each make use of their allowance. This is another area that would be worth getting some advice on if it seems like it may be applicable to you.
End of tax year is a busy time for financial advisers and for good reason, it is a great time to get your money working for you. If you’d like any advice on the areas I’ve touched on, or any other aspects of financial planning, I will be very happy to help.
Julia Magnay, Independent Financial Adviser
Compass Financial Management
01279 260 049