When making your savings and investments work hard, it’s just as important to make the most of your tax reliefs as it is to chase the best interest rates and portfolio returns.
ISAs are just one example of the ‘low effort’ strategies that people can implement every year which, over time, may greatly enhance their savings. But with the end of the tax year approaching rapidly, you should be aware of other simple actions that could prove valuable.
Consider these key ways to make the most of tax reliefs before 5 April – the benefits of which may last a lifetime.
1) Use your ISA allowance
- Those aged 18 and over can invest up to £11,520 each
- Parents can also fund Junior ISAs up to £3,720 each (which equate to a total of £34,200 for a family of five)
- Remember that income and capital gains from ISAs are tax free, so consider using the allowance for your risk based investments rather than your cash
2) Consider possible pension contributions
- The pension Lifetime Allowance (LTA) reduces to £1.25m on the first day of the new tax year (6 April), so check your pension benefits before then. If you expect your pension fund to exceed the LTA when you retire, consider applying for ‘Fixed Protection 2014’ – but beware as this might preclude you from further pension savings once you have applied for it. We strongly recommend seeking professional advice
- The next tax year will also see the annual pension contribution which attracts tax relief at your marginal rate reduce to £40,000 gross. You should check this year and contribute the maximum amount if your UK relevant earnings allow it
- You will receive 20% tax relief if you make a stakeholder contribution of up to £3,600 gross for your children or non-working spouse
- For parents: if making a further pension payment brings your individual taxable income(s) below £50,000, you may be able to reclaim / retain child benefit (e.g. you would currently receive £2,449 p.a. in child benefits for three children of education age)
3) Transfer assets
- Transfer income producing assets to your spouse or civil partner if they are a lower rate tax payer. Calculate the income from the asset per £1 and transfer enough to use up the lower tax band. (e.g. Mrs X is a 40% taxpayer, Mr X is a 20% taxpayer, so transfer assets to Mr X)
- The same can be done with regard to capital gains, which is charged at 28% for high rate taxpayers and 18% for basic rate. Transfer assets with gains to the lower rate taxpayer and use up both of your allowances, which stand at £10,900 each for the 2013/14 tax year
- When it comes to inheritance tax, you can use your annual exemption allowances of £3,000 each for the 2013/14 tax year. If you didn’t use last year’s allowance you can add that, increasing the allowance to £6,000 each
4) Offset losses to reduce your capital gains tax
- Consider ‘realising’ a gain or loss to offset against your annual CGT allowance (£10,900)
- Remember also that you can effectively increase your CGT allowance if you decide to sell one of your assets at a loss, since this can offset gains elsewhere
- Note that excess losses can be carried forward, but normally have to be claimed within four years
5) Seek advice on other forms of enhanced tax relief
For those with a higher risk appetite, an Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT) can offer some great tax incentives, but it is essential to seek advice before investing in this sort of scheme.
- You can invest up to £1m into an EIS per tax year, although note that you must remain invested for a minimum of three years. For those with a medium term investment horizon, benefits include 30% income tax relief on the premium, deferral of capital gains tax and the ability to offset capital losses against your income tax bill
- You can invest up to £200k per tax year into a VCT (minimum 5 years), the benefits of which include 30% income tax relief on the premium, and dividends that are free of income tax
- Note that to receive the 30% tax relief you need to have paid at least the equivalent amount in income tax
Please remember to seek professional advice as everyone’s individual circumstances are different. Our full tax guide for 2013/14 can be found here