Getting to grips with Tax Year End
The 5th of April is fast approaching and with it brings a sense of panic as you try to organise your last-minute finances. Although the last year has been clouded by uncertainty and changes in regulations, the importance of organising our clients' finances has continued to be at the forefront of our minds. Each year we have several allowances available to us which are lost if they are not utilised before the 5th April deadline. With this in mind, we have highlighted our 5 top tips on areas of your finance you should be addressing each tax year:
1. Individual Savings Account (ISA)
ISAs are free of both Capital Gains and Income Tax and are therefore used as one of the most tax-efficient ways to save. Utilising your ISA allowance should be seen as the top priority each year. The most you can pay into an ISA each tax year currently stands at £20,000. This can be paid into either a Cash ISA, a Stocks and Shares ISA or a combination of the two. However, if you have children or grandchildren, the Junior Individual Savings Account (JISA) can be used as an additional means of ISA savings. Contributions are currently limited to £9,000 per tax year but have the same tax benefits as an adult ISA.
Your pension is another great means of tax-efficient saving. However, there are limits to the amount you can tax-efficiently pay into your pension. Limits are currently set at the lesser of 100% of your annual earning or £40,000, this is otherwise known as the Annual Allowance. However, for high earners, the Annual Allowance could be as low as £4,000 if certain conditions are exceeded.
Pension contributions also have the benefit of carrying forward which allows your unused Annual Allowance to be rolled over from the previous three years. Therefore, if you earn in excess of £40,000 you may still be able to claim tax relief on further contributions.
3. Capital Gains Tax (CGT)
Each tax year you can also benefit from an Annual Exempt Amount (AEA) to which no CGT is paid on profits from selling qualifying assets. The current AEA stands at £12,300, so if your overall gain, in any given tax year, is above this amount then CGT will be due.
Jointly owned assets can use both allowances should you sell and make a gain, although, the exemption does not roll over from year to year. So, if you are planning to sell a valuable qualifying asset and have already used the majority of your AEA, it might be worth delaying the sale until after April 5th.
The Dividend Allowance lets investors, and shareholders, receive £2,000 of dividends free of Income Tax. If this allowance is exceeded, then dividends will be taxed at the following rates:
· 7.5% for basic rate taxpayers
· 32.5% for higher rate
· 38.1% for additional rate
Taking dividends, either from your business or an investment portfolio, within this allowance can help create a tax-efficient income.
5. Inheritance Tax (IHT) - Making Gifts
Finally, if you are trying to reduce, or remove, a potential IHT liability, making gifts to loved ones is one of the simplest methods.
IHT is due at a rate of 40% on part of your estate when you die if it is in excess of a particular value. Currently, individuals could be entitled to a maximum IHT allowance of £500,000, and married couples could have a combined allowance of £1,000,000 (subject to certain criteria) before IHT could be due.
By making gifts during your lifetime, you can effectively reduce the value of your estate and therefore reduce any value in excess of the above limits. The annual gift allowance lets you gift up to £3,000 immediately free of IHT. Unused allowance carries over just one year, so if unused an individual could gift up to a maximum of £6,000 within a given tax year. There is also a ‘seven-year rule, meaning gifts of any value are exempt from IHT if you live for at least seven years after making it.
If you'd like to speak with us about tax year end and your finances, feel free to contact us at firstname.lastname@example.org