Many people don’t always realise the significance of the end of the tax year until it’s too late. Each and every year, an individual has a set of allowances allocated to them and some of these can be lost if action isn’t taken.
So with the 6th April and the dawn of a new tax year fast approaching, what do you need to consider?
We’ve put together our top 10 considerations – split over two instalments. Here are the second set of 5…
Clients approaching retirement: boost pension saving now before triggering the MPAA
Once you reach retirement age and start to take pension income (but not tax free cash) from a defined contribution pension (over and above your tax free cash allowance), the amount you can pay into a pension and still get tax relief reduces. The amount you can continue to pay into a pension is known as the Money Purchase Annual Allowance (MPAA) – and is currently only £4000 per year.
Anyone approaching retirement age may want to consider boosting their pension pot before April. The full annual pension allowance is £40,000 (or up to a maximum of your net relevant income) and there are also rules that allow any unused allowances from the past three years to be carried forward.
Use ISA allowances
ISAs offer savers valuable protection from income tax and Capital Gains Tax (CGT). The ISA allowance is limited to £20,000 per annum per individual and if it is not used in any given tax year it is lost forever. It is therefore worth considering maximising ISA contributions to the annual limit. Many of our clients have used their allowances over many years, and as a result, they have significant amounts of money held within a tax wrapper which offers a valuable tax shelter. This pot will provide a valuable source of tax free income in retirement.
Maximise personal pension contributions
There are many benefits to contributing to a personal pension, so if you are in a position to be able to do so, making a payment up to the maximum pension allowance will likely serve you well. This is especially true for additional and higher rate taxpayers as the current levels of generous tax relief at 45%, 40% or even 45% may not be around forever.
Carry forward rules
An individual’s level of income can vary from year to year, as can the demands on that income. Therefore, the amount that an individual can contribute to a pension fund may not remain static. Should you have unused allowances from the past 3 years, you may not be aware that you can carry thee forward. The annual allowance has been £40,000 since the 2014/15 tax year. To qualify, you must have had a personal pension arrangement in place in an earlier year, although you don’t have to have contributed.
Investments: take profits from taxable investments using CGT annual allowances to fund income, cash requirements or simply enhance the tax efficiency of your portfolio
The capital gains tax exemption is the most underutilised tax allowance. For tax year 2018/19 individuals can take profit from their investment portfolio of up to £11,700 per annum without paying capital gains tax.
Individuals could use this allowance to supplement their income tax-efficiently. For those who do not require additional income or cash, taking profits within the £11,700 CGT allowance and moving the money into more tax efficient investment vehicles like pensions and ISAs may help shelter gains from capital gains tax in the future, create immediate income tax savings (in the case of pension contributions only) and ultimately make their investment portfolio more tax efficient. This supports the ability to take profits more tax efficiently in the longer term.
The advice is very simple; tax has a major impact on net investment returns in the longer term and the best way to manage that liability is to ensure that you action a small number of items on your tax year end checklist each year. The cumulative effect of doing so will compound into real monetary savings. For more information on any of the above points, please contact our financial advisers for advice.