The end of the tax-year is a great time to be thinking about your finances.
How can you save and invest tax-efficiently? How can you save tax? What opportunities will you lose when the new tax-year starts?
We’ve pulled together six top tips which you should consider before the end of the tax-year.
1. Use your ISA allowance
Probably the most popular end of tax-year tip. As the tax-efficient savings and investment options are slowly reduced, ISAs (Individual Savings Accounts) have become the cornerstone of financial planning.
In summary the limits in the current tax-year are:
- ‘Adult ISA’ up to £11,520, of which a maximum of £5,760 can be held in a Cash ISA
- ‘Junior ISA’ up to £3,600 each year
Anyone who has savings or investments should contribute the maximum possible each year to an ISA. If you are saving on behalf of your child or grandchild then the Junior ISA is also valuable, perhaps not now, after all most children are not tax-payers, but you are building up a valuable tax-free savings pot for them to enjoy later in life.
2. Top up your pension – part 1
Pension contributions can be a very tax-efficient way of planning for retirement, not least because of the tax-relief which you receive on contributions.
But, the maximum amount you can pay into your pension is being cut. In the current, 2013/14 tax-year, you can pay in up to £50,000, including tax-relief, from 6th April this drops to £40,000. This of course assumes you have the income to be able to pay in these amounts.
If you are thinking about making a large lump sum pension contribution, don’t leave it too late and remember, the proposed changes to pensions, announced in the Budget, will make your pension pot more accessible when you retire.
3. Top up your pension – part 2
Although the annual amount you can pay into a pension is capped, you can ‘mop up’ any allowance you might not have fully used from previous years.
Known as ‘Carry Forward’, the rules are complex, but essentially allow you to pay contributions in the current tax-year using unused allowances for the last three tax-years.
However, if you are making contributions personally you cannot pay in more than you have earned in the tax-year, and if your employer is making the payments then they have to fit within the HMRC’s ‘wholly and exclusively’ rules.
If you want to make large pension contributions then get in touch with one of our team of experts, we can recommend the best option for you.
4. Use your pension to offset changes to child benefit changes
Two years ago the Government introduced new rules which reduced the amount of Child Benefit received by parents. Where one parent earned above £60,000 the benefit was withdrawn completely and where a parent earns between £50,000 and £60,000 it is reduced by 1% for every £100 of income above £50,000.
This is a double blow for parents. Not only are they paying 40% tax on their earnings, the loss of Child Benefit is reducing the household income. The table below shows the effective rate of tax now payable by a £60,000 earner as a result of these changes:
|Number of children||Child benefit lost each year||Effective tax-rate paid||Total tax-rate|
The end of the tax-year gives the perfect opportunity to reduce the effective rate of tax by making pension contributions.
The income used to calculate whether you will lose any of your Child Benefit is actually called ‘adjusted net income’, which is calculated as your gross pay less certain deductions, including pension payments.
Therefore if you earn above £50,000 each year, making a pension contribution could reduce your ‘adjusted net income’ to below the level where your Child Benefit is removed. Of course you will also receive 40% tax-relief on your pension contribution; neatly reversing the double blow we mentioned earlier.
How might this work in practice? Here’s an example:
John and Jane have four children. Jane earns £50,000 and John earns £60,000.
John pays 40%, or £4,000 tax, on all of his income between £50,000 and £60,000. If John does nothing and makes no pension contributions they will lose their Child Benefit, either directly or through a tax charge.
In the 2013/14 tax-year this means John is effectively paying tax of £7,146 on the band of earnings between £50,000 and £60,000.
However, there is a way round this. John can make a net pension contribution of £8,000. This has the following benefits:
- The £8,000 pension contributions benefits from tax-relief, which increases it to £10,000
- An additional £2,000 tax-relief can be claimed by John, taking the net cost of a £10,000 pension contribution down to just £6,000
- John’s ‘adjusted net income’ is reduced to £50,000 which means the household will continue to receive Child Benefit with no reduction
5. Use your Capital Gains Tax allowance
Most investments, such as funds, shares or property, held outside of a SIPP or ISA will attract Capital Gains Tax (CGT) if you sell them at a profit.
In the current tax-year you can make a gain of £10,900 without paying tax, but to benefit from this allowance you need to have sold the investment and ‘crystallised’ the gain during the tax-year.
You should also remember that you cannot carry forward unused CGT allowance from a previous year. In other words if you don’t use it, you will lose it.
6. Use your Inheritance Tax annual exemptions
With investments rising in value, house prices increasing at record rates and the Inheritance Tax threshold stuck at £325,000 more and more estates will be left to pay Inheritance Tax.
But careful planning when you are alive could help to reduce the amount of tax your beneficiaries have to pay.
One very effective way of reducing IHT on your death is to make gifts whilst you are alive.
For example you can give away up to £3,000 each tax-year and the amount of the gift is immediately outside of your estate for IHT purposes. You can also carry forward the annual exemption from last year. But only the last year, so again, this is another ‘use it or lose it’ allowance.
There are additional gifts which can be made in respect of marriages, as well as small gifts up to £250.
More information on this can be found on the HMRC website, click here.
Do you need help planning for your retirement?
If you would like a review of your finances to ensure they are arranged as tax-efficiently as possible call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org