Gone are the halcyon days where one could do a single thing before retirement, such as make large lump sum payments to pensions. Rather, good financial planning is now built on the discipline of making best use of a range of your limited tax and investment allowances on a year on year basis.
We have set out below a high-level checklist to think about before 5th April to ensure you are making best use of available allowances.
Pension contributions attract UK tax relief. There are, however, restrictions on the amount of tax relief available. An individual can pay an unlimited amount into a pension, but there is a limit on the level of contributions that can receive tax relief. This is currently the higher of £3,600 and 100% of the individual’s relevant UK earnings, subject to a maximum of £40,000 (the Annual Allowance).
The Government introduced a reduction to the Annual Allowance for higher earners that took effect from 6 April 2016. For those with adjusted earnings over £150,000, the annual allowance is reduced by £1 for every £2 over the £150,000 threshold, down to a maximum of £10,000 per tax year where earnings are in excess of £210,000. One also needs to consider any other contributions that have been made, e.g. employer contributions as these reduce the allowance available.
Unused tax relief from up to three previous tax years may be available to carry forward. For those with a tapered annual allowance, this represents the last chance to carry forward from a year where their annual allowance would have still been £40,000.
Should you be considering whether this is your last chance to make a sizeable pension contribution?
Your ISA allowance is a generous £20,000. This allowance is the maximum you can pay into an ISA in a single tax year while taking advantage of their tax-free benefits. ISA allowances don’t roll over between tax years. There is also a £4,260 Junior ISA allowance for making tax-free savings for children under 16.
Capital Gains Tax
If you own investments outside your pension or ISA, you could pay Capital Gains Tax (CGT) when you sell these. The annual CGT allowance is currently £11,700. This means you can make up to £11,700 of gains this tax year before being liable for tax on these. As such, where this allowance is currently unused, it represents a good opportunity to rebase your capital or take some profit from your portfolio.
Personal Savings Allowance and Dividend Allowance
You won’t pay any tax on any interest from your savings accounts up to your Personal Savings Allowance. The allowance is £1,000 for basic-rate taxpayers or £500 for higher-rate taxpayers, but disappears for additional-rate taxpayers. You can also receive up to £2,000 of dividend income from shares held outside of a pension or ISA without paying any tax.
Making financial gifts
Each tax year you get a £3,000 allowance for making financial gifts. Gifts within the allowance can be used to reduce a potential future Inheritance Tax bill as they leave your estate immediately.
The More Esoteric Solutions
Tax payers who can tolerate a high level of investment risk might also consider more complex tax-efficient investments such as Venture Capital Trusts or Enterprise Investment Schemes which offer a number of tax advantages.
As set out, there are opportunities to take advantage of before 5 April and it is still not too late. Importantly, for many this will represent a final opportunity to make a sizeable pension contribution that we would not want you to miss out on. This is general guidance and as such, we are happy to have an exploratory conversation with you to understand what best suits your circumstances and financial objectives. Before making any decisions, you should talk to either a tax or investment professional.