Tax year-end planning: take a step in the right direction

Where are you heading in life? That’s a question that many of us have been asking ourselves over the past year. If you know the answer, one thing’s for sure – having a solid financial foundation and ensuring your money is working as hard as possible for you and your loved-ones will really help.

The good news is, although your destination may be near or far, it’s easy to take the financial steps that can help get you there.

So, whether you’re just at the start or already a long way down the road, the most important thing right now is to take a step in the right direction before the end of the current tax year, on 5 April – that way you can ensure you’re making the most of your current tax allowances and reliefs, which can go a long way to helping you secure your long-term financial goals.

Key steps to consider

ISA

Are you making the most of this year’s £20,000 allowance? Using Stocks and Shares ISAs can be great for investing over the long term and saving for your biggest goals in life.

Pension

Are you getting the most from the tax-saving benefits your pension can bring? There’s a chance the government might reduce some of these soon, so make sure you’re taking advantage before the end of this tax year on 5 April.

Inheritance Tax

Are you thinking about how you can reduce the Inheritance Tax your children or grandchildren might have to pay when you die? Using your gifting allowances before 5 April will reduce the taxable value of your estate.

Junior ISA

Are you looking to save for the children in your life to give them a head start? You can contribute up to £9,000 per child into a Junior ISA with no further liability to Income Tax or Capital Gains Tax.

Capital Gains Tax

Are you sure you won’t get caught in the CGT trap? Make sure you’re paying what you owe, but not paying when you don’t need to. The government might raise CGT rates soon, so make the most of this year’s allowances before 5 April.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and 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. Tax reliefs are dependent on individual circumstances.

1. Make the most of your ISA allowance

ISAs can be a great way of making your money work harder for you, as any money you put in to them is free of any further liability to Income Tax or Capital Gains Tax – so no tax on your interest, no tax on withdrawals and no tax on the profits. You can put up to £20,000 per person into an ISA this tax year (ending 5 April).

ISA key points

Your contribution limit - individuals who are 18 or over can invest up to £20,000 in an ISA this tax year.

Child's allowance - A Junior ISA allowance of £9,000 this tax year is available for those who are under 18.

Tax boost - Returns from an ISA are free of Income Tax and Capital Gains Tax.

Don't delay - You cannot carry forward your allowance. The contribution deadline for this tax year is 5 April 2021.

Stocks and Shares or Cash ISA?

There are two kinds of ISAs: stocks and shares, or cash. If you’re prepared to keep your money in your ISA for at least five years (or longer), stocks and shares can be a great way to go.

That’s because, over the long term, stock markets tend to rise – so as long as you won’t need to access the money any time soon, stocks and shares ISAs have the potential to give you a greater return, particularly as interest rates are currently so low.

The other thing to bear in mind is every saver’s worst enemy: inflation. Even though average price increases are low at the moment, nearly all interest rates for cash savings are even lower. This means that over time the value of your cash would actually go down in real terms.

Choosing to invest in a St. James's Place Stocks & Shares ISA means your money has the chance to benefit from our distinctive investment management approach, coupled with the ongoing advice and support from your St. James's Place Partner to make sure your investments are aligned to your goals and aspirations.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks and Shares ISA will not provide the security of capital associated with a Cash ISA.

The favourable tax treatment given to ISAs or Junior ISAs may not be maintained in the future as they are subject to changes in legislation.

Junior ISAs

Junior ISAs (which allow you to save money tax-efficiently for children up to the age of 18), are a great way to give the kids in your life a good start. As with other ISAs, everything you put in a ‘JISA’ is free of any further liability to Income Tax or Capital Gains Tax. They’re also a great way to watch your money grow year after year as the interest you earn gets compounded.

Perhaps estate planning is also one of your goals. Investing into a Junior ISA for children can be a good way of saving for their future but also having the added advantage of removing money from your estate which might be liable to Inheritance Tax at the time of your death.

The projected figures provided in the video assume a growth rate of 3%, are provided as examples only and are not guaranteed - they are not minimum or maximum amounts. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less than this.

2. Pay what you can into your pension

Generally speaking, a pension is a tax-efficient way of saving for your retirement and due to greater choice and flexibility, it’s a more attractive option for retirement savers than ever before.

Pension key points

Your contribution limit - Most people get tax relief on pension contributions worth up to 100% of their earnings, capped at £40,000 each tax year. This is called the ‘annual allowance’.

Carry forward - If you don’t use all your allowance in one year, you can ‘carry it forward’ for up to three years. The opportunity to carry forward your allowance from 2017/18 will be lost after 5 April 2021.

Turning 75? - You will no longer qualify for tax relief on pension contributions.

Don't delay - The contribution deadline for this tax year is 5 April 2021.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you selected and 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. Tax relief is dependent on individual circumstances.

Using the end of the tax year to plan for your retirement

Your pension is one of the best ways of saving for retirement – particularly because you get income tax relief on the money you put into your pension pot (up to a maximum of £40,000 this tax year). That’s why you should consider paying in as much as you think you can afford on a regular basis.

It’s also worth thinking about topping up your pension as much as you can before the end of this tax year (5 April) and making use of any unused allowances from previous tax years, as it’s possible the government might change the tax allowances available to you – so use them whilst you can.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and 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. Tax relief is dependent on individual circumstances.

3. Use your gifting allowances to avoid unnecessary Inheritance Tax

Unfortunately, too many families are still getting a tax shock when their parents or grandparents die, as the government received a whopping £5.2 billion in Inheritance Tax in the last tax year (HMRC, 2020). Although the tax-free threshold of £325,000 per person may seem generous, the rate at which Inheritance Tax is paid on the rest of your estate – 40% – is not.

Fortunately, there are several steps you can take to reduce your beneficiaries’ Inheritance Tax liabilities – so act before 5 April to take advantage of these.

Inheritance Tax key points

Your gifting allowance - You can give away up to £3,000 each tax year IHT-free

Double up - Using this and last year’s allowance, a couple could potentially remove £12,000 from their joint estate before 5 April

Carry it forward - You can make use of any unused gifting allowance from the previous tax year

Don't delay - The contribution deadline for this tax year is 5 April 2021.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

What can you do about Inheritance Tax?

One of the easiest, and potentially rewarding, ways to reduce a future Inheritance Tax (IHT) bill, is to give some of your wealth away during your lifetime and use your gifting allowance before 5 April. Both you and your partner or spouse can each pay your children or grandchildren up to £3,000 a year and it will be deducted from your total estate if you die.

You can also carry forward this allowance for one year, if you haven’t used it already. So that means, if you haven’t used last year’s allowance, as a couple you can give up to £12,000 which won’t be counted as part of your estate for tax purposes.

That money could be invested on behalf of a child or grandchild. For instance, you could contribute towards a child’s Junior ISA. The most they can save is subject to a £9,000 limit this tax year – an allowance that will be lost after 5 April.

You could also pay £2,880 into a child’s pension this tax year, and this will be grossed up to £3,600 by basic rate tax relief. But bear in mind that, under current pension rules, the child won’t be able to access the money until they are 55.

You should also ensure you set up a Will– or if you already have one, ensure you review it regularly. This can also help you avoid falling into Inheritance Tax traps by, for example, setting up trusts for your beneficiaries.

Please note that advice relating to a Will, necessitates the referral to a service that is separate and distinct from those offered by St. James's Place. Wills are not regulated by the Financial Conduct Authority.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and 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. Tax relief is dependent on individual circumstances.

4. Don’t fall into the CGT trap

Capital gains tax (or CGT) is one of the most complex taxes to understand, so it’s no wonder that people fall into the trap of paying unnecessarily or end up being fined for not paying when they should. This is also made worse by the myth that only the very wealthy are likely to have to pay it.

You’re liable for CGT when you sell an asset at a profit. This could be anything from a second home to stocks and shares – or even valuable items such as jewellery or antiques, which is where people often fall foul of the tax. There’s a tax-free allowance of £12,300 for this year, then after that the rate is dependent on the level of income tax you pay – 10% for basic-rate taxpayers and 20% for higher-rate payers (and 18% and 28% respectively if you’re selling a property).

However, you can claim some ‘allowable expenses’ to reduce your tax bill, such as for house repairs. You can also split your gains over two tax years and make use of tax-free transfers to your spouse – although this can be complicated so it’s worth seeking expert advice.

It’s possible the government will increase CGT in the future, to be more closely aligned with income tax rates – so it’s worth making the most of this year’s allowances and current rates if you can.

Capital Gains Tax key points

Your CGT allowance - The first £12,300 of capital gains per year are tax free.

Tax rates - Basic-rate income taxpayers pay 10% on anything above the annual allowance, and higher-rate taxpayers pay 20%. For property, the rates are higher: 18% and 28% respectively.

Transferring assets - Consider transferring assets between spouses or civil partners to enable use of combined allowances.

Don't delay - The contribution deadline for this tax year is 5 April 2021.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

Your next step

As the 5 April deadline approaches, you may want to consider using the valuable tax-saving and investment opportunities before they are lost. By joining together your goals and our expertise, we can help you reach future financial security. Take a step in the right direction – act by 5 April.