Whether we’re out watching the fireworks or counting down the hours at home with a glass of champagne, most of us are aware of when the calendar year comes to an end. Few of us raise a glass on ‘Tax New Year’s Eve’, however, even though it is a date that could have far more of an impact on our wellbeing in the coming twelve months than the changeover from December to January.
Making plans for the end of the tax year – which is on April 5, with a new tax year starting on April 6 - allows you to make the most of the tax allowances given to you by the government, and to minimise some of the tax you might otherwise pay. Here are five ways to make the most of the early April date, and how to do it.
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Use your entire annual ISA allowance
A tax-efficient ISA is a good way to shelter money from the taxman, and we all have £20,000 a year to put into different types of ISA wrapper, whether in cash savings or in investments. Once the money is in the wrapper, you can swap between different types of product, moving cash into stocks and shares and vice versa, without the money losing its ability to grow free of tax.
The £20,000 allowance is ‘use it or lose it’, so if you haven’t put the money in by April 5 you will have lost the allowance for the 21/22 tax year, so it is worth making sure you’ve tucked away as much as possible before the deadline.
If you have a child with a Junior Isa (JISA), these also have an annual allowance, which is currently £9,000, so you can top these up as well before April 6.
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Save on capital gains tax
Capital gains tax (or CGT) is payable when you sell an asset for more than you paid for it. The amount you pay varies depending on whether you’re selling residential property (although not your own home, which is CGT free) or other assets, and depending on whether you are a basic or higher rate taxpayer.
Everyone has an annual capital gains tax allowance, however, meaning that if you dispose of some of your assets in one tax year and some in another, you can pay less tax than if you sold them all at once. This year you can make gains of £12,300 without paying tax on your assets. You cannot carry forward this allowance to the next tax year so it makes sense to ensure you’ve sold assets before the tax year ends to utilise the allowance. Shares inside an ISA also do not attract CGT, which is another good reason to make the most of your ISA allowance.
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Use your pension annual allowance (and those from the past three years)
You also have an annual allowance on pension savings, with most of us allowed to put in £40,000 a year to save for retirement (those earning over £240,000 a year have smaller allowances – see here for details). Because the government pays back the tax you’ve paid on pension contributions, this is a very valuable benefit, so it makes sense to use as much of the £40,000 allowance as you can.
Unlike with the CGT and ISA allowances, however, you are allowed to add the previous year’s pension allowances to this year’s entitlement, which is particularly useful for those who are self-employed and may receive money in chunks. Pension allowances can be carried forward for three years but you will then lose your entitlement to them, so it is important to check what is available to you at the end of the tax year.
If you are making large pension contributions, it is also important to check you aren’t falling foul of the pension Lifetime Allowance. Above this threshold (currently £1,073,100) you will pay tax on your pension contributions. This allowance could be cut in future, although you can make some arrangements to protect your pension pot from future reductions to the allowance. See here for more details.
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Make IHT provisions
Inheritance tax, which is paid on your estate after you die, is levied at 40 percent of your estate over £325,000. You can give away money while you are alive to try to reduce the burden on your descendants, but this is subject to what is known as the seven-year rule, which means you must survive seven years after making the gift or it will be counted as part of a taxed estate.
However, you can make a certain number of gifts every tax year that are outside of this rule, so it makes sense to ensure you’ve made them before April 6.
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. There are some other ways to make exempt gifts as well, and these are all on this website.
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Consider tax-efficient products
There are some specific tax-efficient investment products that can reduce your overall tax bill for a year, and these should be considered before the tax year ends if you have a bill you wish to reduce. Venture Capital Trusts, or VCTs, and Enterprise Investment Schemes (EIS) are riskier investments that allow you to buy into early-stage companies but offer 30 percent tax relief on the amount you invest.
They are only suitable for relatively sophisticated investors so you should speak to your financial adviser if you think they are suitable for you.