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Spruce-up

31 January 2017

Get your personal finances into shape by making the most of all the allowances and exemptions available before the end of the tax year.

Tax allowances and exemptions usually come with a deadline attached, and all the more so when squeezed government finances are creating pressure for policy shifts. As the end of the tax year on 5 April approaches, now would be a good moment to review your finances.

Perhaps the most useful allowance is the Individual Savings Account (ISA), which allows investments to build up without any further tax to pay on income and capital gains. Everyone has their own allowance – £15,240 in the current tax year – which means that couples can shelter £30,480 between them.

There is also a Junior ISA annual allowance of £4,080 for children under the age of 18. Anyone – family or friend – can contribute to the fund, which cannot be accessed until the child reaches 18, when they will get full control over the money.

The ISA allowance will rise to £20,000 from April, but any unused allowance from this tax year will be lost.

Going, going…?

This could be a particularly good year to maximise pension contributions. In the Autumn Statement, Chancellor Philip Hammond highlighted the annual £48 billion cost of pension tax relief, sparking renewed concerns that he may soon be tempted by the savings to be achieved from a cut in the benefits for higher rate taxpayers.

“Maximise what you can do on pensions now because the current regime may not last,” says Tony Müdd, Divisional Director, Development & Technical Consultancy at St. James’s Place.

Müdd expects the Treasury to cut back on upfront pension reliefs for higher earners. The introduction of the Lifetime ISA from April also hints at a different approach to tax incentives on savings.

Pension tax relief has been limited through recent law changes. But it is still worth making the most of the current annual allowance of £40,000 (or 100% of earnings if that is lower), although there are restrictions for additional rate taxpayers. There is an overall limit of £1 million which can be accumulated in a pension pot over a lifetime, without triggering an extra tax charge.

Even those who have little or no annual earnings receive an allowance of £2,880 a year, which will be increased to £3,600 by basic rate tax relief. This can be a useful way to save for children and non-earning partners.

Pension pots can also, in most cases, be passed on completely tax-free when someone dies before the age of 75. For deaths over that age, income taken from the pension fund will be taxed at the recipient’s marginal tax rate. However, whatever the age of death, their pension is generally not part of the estate for IHT purposes, nor is it subject to Capital Gains Tax (CGT).

“It’s an incredibly efficient way of passing on your wealth, if you can afford not to touch it,” says Müdd.

Family fortune

Those with estate planning needs should consider using their gifting exemptions before 6 April. The main one is the £3,000 annual exemption, which can cover just one recipient or be split across several. The value of these gifts will immediately fall out of the estate for Inheritance Tax purposes. Other exemptions cover wedding gifts, where the allowance varies from £1,000 to £5,000 (depending on your relationship to the couple); regular gifts made out of surplus income; and any number of gifts worth less than £250 in a single tax year.

Married couples and civil partners will get the best out of their personal allowances (set at £11,000 this tax year), and other allowances and reliefs, if they plan their holdings so that both individuals are shielding the maximum from tax.

The tax regime for CGT is relatively generous, as every taxpayer has an annual allowance of £11,100; gains above that are taxed at 20% for higher rate taxpayers (10% for basic rate), or 28% for residential property-related profits (18% for basic rate). If your spouse is not using their allowance, you can transfer assets across – a procedure that is not subject to CGT. If you both then sell assets before the end of the tax year, you can effectively double the allowance to £22,200. However, if you don’t exploit the allowance this year, it doesn’t roll over and is lost forever.

“The best solution is to structure your investments in as many different forms for tax purposes as you can,” says Müdd. “This and future governments may change how tax is applied; so using several wrappers is best.”

 

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
  
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

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