Ten steps in the right direction this tax year end says Shrewsbury financial adviser
30th March 2017
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As the end of the tax year approaches, now is the time to use reliefs and exemptions that otherwise would be lost.

Putting in place and reviewing plans to help secure your financial future, not to mention supporting the needs of your wider family, is a year-round task. But for many individuals it is only during the run-up to the end of the tax year that they are prompted to take action to avoid missing out on the valuable tax-saving allowances and opportunities that expire after 5 April. Here are ten ideas to consider.

1. Use your ISA allowance

The ISA allowance is one of the most popular allowances available – and for good reason. It’s a simple way to invest for the long term, with no further tax to pay on income, and with growth free from Capital Gains Tax, providing protection from HMRC. If you’re over 18 and a UK resident, you can invest up to £15,240 in the current tax year. The allowance will rise to £20,000 in the next tax year, but any unused allowance from this tax year will be lost after 5 April.

You can split your allowance however you choose between a Stocks & Shares ISA and a Cash ISA. Nevertheless, many savers are at risk of wasting the potential benefits of their allowance by saving into low-paying cash accounts. Based on the current average cash rate, depositing the full £15,240 allowance in a Cash ISA would earn interest of just £124.97 in the first year.1Those who are prepared to take a long-term view can invest in a Stocks & Shares ISA and potentially shelter much larger gains, although returns are not guaranteed.

2. Contribute to a pension

A pension is still arguably the most tax-efficient way to save for retirement. Contributions into a UK-registered pension attract tax relief on the way in and accumulate capital gains free of tax once inside. Furthermore, pension savings are free from Inheritance Tax, making them an effective way to pass wealth to the next generation.

If you are looking to maximise these benefits, you should try to utilise your pension allowance for this tax year and then look at any unused allowances from the three previous tax years. If your 2016/17 allowance is fully utilised, you should review whether you have any unused allowance from the 2013/14 tax year, which would otherwise be lost after 5 April.

3. Two allowances are better than one

Each individual has an annual ISA allowance. Therefore, if you have a spouse or civil partner, you could both maximise your ISA allowances to fully utilise the combined allowance of £30,480. Furthermore, you could invest into a pension for a non-earning spouse. Each tax year, non-earners can make a £2,880 pension contribution which is grossed up to £3,600 by basic rate tax relief – even if they pay no Income Tax.

4. Give your children a head start

Children get their own allowances. This tax year you can make contributions of up to £4,080 per child into a Junior ISA and £2,880 into their pension, which is grossed up to £3,600 with basic rate tax relief. Children have very long-term investment horizons and greater opportunities to benefit from compound growth; helping them to invest even a small amount on a regular basis could make an enormous difference by the time they reach retirement, or when they face financial challenges earlier in life.

5. Take pension benefits tax-efficiently

Budget documents released by the government revealed that the Treasury raised £1.5 billion in tax resulting from pension freedoms in 2015/16, against an initial estimate of £300 million. It expects to raise nearly double its estimate in this tax year², which suggests that many individuals are failing to take simple steps to reduce their tax bill.

If you’re over 55 and thinking of making a large withdrawal from your pension pot, you might consider spreading it over two or more tax years. Depending on income from other sources, you could potentially minimise how much Income Tax you’ll have to pay at the 20% or 40% rate.

6. Regain important tax allowances

If you are a high earner, you can take steps to bring your taxable income below certain thresholds by making pension contributions or charitable donations before the end of each tax year. Doing this can also help you regain important tax allowances. For instance, you could regain your personal allowance, which starts to be withdrawn when you earn more than £100,000. You could also regain entitlement to Child Benefit, which is removed progressively on earnings above £50,000 a year.

7. Use your gifting allowance to reduce your taxable estate

Inheritance Tax is arguably a tax on inertia and on people’s reluctance to confront estate planning. Consequently, it is for many considered a voluntary tax – money which could instead stay in the family to support future generations. You should therefore consider using your gifting exemption of £3,000 for this tax year, and carry forward last year’s exemption if it hasn’t already been utilised. This money moves immediately out of your estate – you don’t have to survive for another seven years, as is usually the case with other, larger gifts.

8. Use your Capital Gains Tax allowance

If you hold investments outside of a pension or ISA, you might have to pay tax on the gains when you sell them. Thankfully, everyone gets a Capital Gains Tax (CGT) exemption of £11,100 this year. Those with larger CGT liabilities should therefore consider taking gains over two or more tax years, and/or transferring investments to a spouse or civil partner. If you both sell the assets before the end of the tax year, you can effectively double the allowance to £22,200. This is another case of ‘use it or lose it’ – if you don’t exploit the allowance in this tax year, it doesn’t roll over and is lost forever.

9. Pay dividends instead of salary

If you run a profitable company, the combination of a small salary and dividends is probably still the most tax-efficient form of remuneration, despite last year’s changes to the way dividends are taxed. In this tax year and the next, the first £5,000 of dividend income is tax-free; the tax rates on dividends issued above £5,000 will depend on the tax bands you fall into. In last week’s Budget, the chancellor announced the dividend allowance will drop to £2,000 from April 2018; so it makes sense to make full use of the higher allowance while it’s still available.

10. Business owners can use profits to supplement their pension

If you’re a business owner, money that would otherwise have gone to the HMRC could instead boost your retirement savings. Company pension payments are deductible as a company expense and can therefore reduce or possibly wipe out liability to Corporation Tax. Additionally, under pension freedoms rules, those over the age of 55 can take the whole of their pension pot back and use the cash broadly as they wish – including up to 25% of the total fund tax-free – with the remainder subject to Income Tax at their marginal rate. This would need to be carefully considered though.

Contributions will need to be paid before the company’s financial year-end in order for the business to qualify for the deduction in that accounting period. A popular year-end date for many companies is 31 March. If applicable, owners of the business should try to bring forward pension contributions to before this date.

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Nick Jones on 01743 240968, by email nick.jones@sjpp.co.uk or visit www.njwealthplanning.co.uk or www.njwealthplanning.co.uk/workplacepensions

The Partner Practice represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
 
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1 Moneyfacts.co.uk, 7 March 2017

² HM Treasury, March 2017

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About the Author

Nick J

Member since: 14th February 2012

I am a Shropshire based financial adviser who helps my clients manage their finances as effectively as possible. I specialise in investments, retirement planning and Inheritance Tax Planning.

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