Article by Chris Brown
This time of year is a busy one at the Prosperity offices, as we ensure those last pieces of business are completed before the end of the tax year on 5th April.
Here is a quick and handy checklist of the things you should be considering (note if you already have a Prosperity advisor, these will by now have been taken care of):
The annual ISA allowance has been set at £20,000 and isn’t changing for 2019/20. What is an ISA? Put simply, anything within an ISA can generate tax-free growth, tax-free income in the form of interest or dividends, and when you take your money out, this is also tax-free! You can invest £20,000 per year across Cash ISAs, Stocks & Shares ISAs and Innovative Finance ISAs. Lifetime ISAs have a limit of £4,000 per year and this counts towards your £20,000 allowance. And don’t forget those Junior ISAs for under-18s, which provide an additional £4,260, rising to £4,368 for 2019/20.
My ISA is great but my pension is rubbish, right? Wrong. Pensions are even more tax-efficient, as you get tax relief on any contributions. For a basic-rate taxpayer, this means an £80 contribution immediately turns into £100, with £20 added by the taxman. Sure, but it’s taxed when I take it out, isn’t it? It is, but you get a quarter of your pension tax-free, so even assuming the remainder is taxed at that 20% basic rate (and remember, you may have some zero-rate personal allowance available), you still benefit to the tune of 6.25%. That’s a minimum, guaranteed risk-free return of 6.25% – not bad!
If you’re a higher rate taxpayer when making the contribution, and a basic rate taxpayer when drawing your pension, the risk-free return is a massive 41.66%.
How much can you pay in? The rules can get complicated, but most people are limited by their annual earnings – your pension can’t receive more contributions (tax-relief included) than the amount you earn each year. If you have no earnings the limit is £3,600. For higher earners your local Prosperity advisor will guide you through the £40,000 Annual Allowance and other considerations. And remember, if you have any annual allowance carry-forward available from 2015-16 and don’t use it now, you’ll lose it!
Inheritance Tax Gifts
For those with significant assets or property wealth, whose loved ones may face the prospect of paying inheritance tax, a small way to reduce this burden is the £3,000 annual gift allowance. You can gift this amount each year which immediately drops out of your estate. It can be carried forward one year if unused (so £6,000 maximum in any given tax year). Combine this with small gifts of £250 per recipient each year and you can begin to make a difference. Again, speak to your Prosperity advisor for more comprehensive planning in this area.
Capital Gains Allowance: this is a good time to trim any investments held outside pensions or ISAs which are showing a capital gains tax liability. Sell enough to limit your gain to £11,700 and no tax will be payable. The allowance increases to £12,000 for 2019/20.
Dividend Allowance: if you have the option to take dividends from a company or any stand-alone investments held outside pensions and ISAs, you can take £2,000 tax-free each tax year.
Do It at the Start of the Year – Not the End!
One final thing to point out: you might be amazed at the difference between investing at the start of the tax year, rather than waiting until the end.
Research from Fidelity shows that over the last decade investing the full ISA allowance on the first day of the tax year produced a pot of £180,000, versus £170,000 if it was invested on the final day of each tax year. That’s a difference of £10,000, just by being organised!
Do you want to be the early bird, or the last-minute laggard?