Financial Fundamentals : Using your annual tax allowances before 5th April

This month, as part of our Financial Fundamentals series, we're looking at ensuring you get the most from your annual tax allowances and you allow enough time to get things in place.

The 2020/21 tax year ends on 5 April which will be here before we know it , so the next few weeks is the time to make sure you take advantage of all the allowances available to you before they reset for the new financial year.

Making use of your allowances at the end of the tax year can involve investing in ISAs , making a pension contribution , locking in gains made on certain investments or making tax efficient gifts.

The earlier you consider and review your options the more time you have to work with your adviser and avoid any last minute rush.  We would always suggest reviewing matters at least four weeks before the end of the tax year to make sure everything is in place well before the 5th April in order you do not lose this year’s allowances.

So what opportunities might still be available to you as the financial year draws to a close?

Stick away extra savings

Many of the vehicles we use to save, whether for retirement or rainy days, have limits on how much we can contribute in a tax year. If you are one of the households who were lucky enough to see your savings rise as a result of the pandemic, why not make some additional payments to an ISA or pension?

In the UK, every adult can contribute up to £20,000 to an ISA in a single tax year. There are various types of ISA to choose from, from Cash ISAs for simple savings to Investment/Stocks and Shares ISAs which build an investment portfolio on your behalf. If you have part of your annual £20,000 allowance left, why not top up or invest in an ISA before the new tax year to maximise your tax free allowance.

Rev up your retirement funds

If you’re saving for retirement, no matter how far off it might seem, contributing the maximum amount possible( or what you can afford)  to your pension will pay off in the long term. Subject to certain conditions being met you can claim tax relief on contributions of up to £40,000 in 2020/21. You can also carry forward any unused contribution allowances for up to three years, as long as you were a member of a registered pension during that time, meaning that if you haven’t used any of your contribution allowances since April 2017, you could receive tax relief on contributions of up to £160,000 in this tax year.(Again subject to various rules).

Alternatively, you might be planning to make a withdrawal from your pension pot. For example to use up any unused personal allowance or to take your income to just below the higher rate tax threshold. Our advice is to move quickly to confirm your remaining personal allowance and make the withdrawal as many pension companies can take up to a month to process withdrawals. You might find it helpful to speak to an expert to determine the most tax efficient way to build up and draw down on your pension savings.

Maximise relief on Capital Gains Tax

Before the end of the tax year, it is useful to assess your likely liability for Capital Gains Tax (CGT) and make sure where possible you have used your annual CGT allowance.

Capital Gains Tax may be due if you’ve made a profit selling (in our world) shares, certain investments or a second home. The gain, or profit, you made by selling or giving away your items will be subject to CGT if the profit  (rather than the overall purchase price) exceeds your annual Capital Gains Tax Free Allowance of £12,300.  Act now to check whether you might need to pay CGT. Investors also have the option with certain investments to switch funds which allows them to crystallise gains within the allowance levels tax free.

Inheritance Tax

Inheritance Tax rules can be confusing for many people including what allowances are available if you wish to gift monies to family. Dependent on how your estate is distributed on death if the value is above the nil rate band of £325,000 and also up to £175,000 available from the residential nil rate band your loved ones may be required to pay Inheritance Tax  Thanks to the long term rise in property prices, many families find themselves unexpectedly liable for Inheritance Tax once the family home is valued as part of the estate. There are however various allowances and ways to reduce any potential IHT liability including an annual exemption to make gifts to your loved ones which won’t be counted towards the valuation of your estate and therefore will not be subject to Inheritance Tax. Under the annual exemption, you can give gifts, including cash, up to the value of £3,000 each year, spread across multiple recipients or all to one person.     

Get expert advice

A quick spring clean of your finances before the new tax year could result in serious long-term savings. Whether you want to maximise your tax efficiency or put any unexpected lockdown savings to good use, why not get in touch to see about a free of charge initial meeting to see how you can capitalise on what’s left of this financial year or start your planning for the next one!

You can also revisit our January article here on the benefits of managing your cash flow