Whatever your financial goals, don’t miss this year’s use-by date for your tax allowances
Don’t let your tax allowances and reliefs go to waste – make sure you take action before the end of the tax year on 5 April.
With the ongoing COVID-19 pandemic making the future feel uncertain, you may feel torn between wanting to save for your long-term financial goals and shorter-term measures.
You may be rebuilding your income and savings buffer after a challenging period, planning for a long-awaited holiday or wondering what to do with the extra money you’ve saved during lockdown.
Melloney Underhill, Marketing Insights Manager at St. James’s Place Wealth Management, says there’s no need to punish yourself for feeling torn. “The best thing is to look for a balance, then put what you can into all the different areas of your life,” she says.
To do this, it helps to clearly understand your goals and how you will make them possible financially. If you’re unsure whether they’re achievable, step back and think objectively, says Underhill. Then you can create a plan.
Seeking expert financial advice can help, and there’s no better time to start than now, she says. What’s more, acting before the end of the 2021/22 tax year on 5 April – and making the most of all the allowances and reliefs available to you before their use-by date – could go a long way towards helping you reach your short and long-term goals sooner.
Underhill says a good starting point is to see which of the following scenarios is closest to your situation and aims, then think about what steps will help you achieve them.
If you’re starting to build a financial foundation…
…you can consider taking on more risk with your investments. The longer your money is invested, the greater the potential rewards.
“Tax-efficient wrappers such as ISAs and pensions are ideal ways to begin your investment journey,” says Underhill. “You can put your money into a wide range of investments, which helps to reduce your risk and broadens the potential opportunities for longer-term growth.”
The returns provided by the tax advantages of pensions and ISAs are particularly valuable, she says.
“Unlike assets held outside these wrappers, you don’t pay Capital Gains Tax (CGT) on the growth, and that can make a huge difference.”
The government has put off proposals to raise CGT to bring it in line with Income Tax rates. But Underhill warns it might revisit this in future, so planning around CGT now – before the end of the tax year on 5 April – could help reduce your tax bill in years to come.
If you’re securing the financial future for you and your family…
…don’t panic if you haven’t done much about this yet – you’re not alone. People often put off investing for the future as they manage today’s cash-flow needs, particularly during these difficult times, says Underhill.
“But it’s never too late to begin,” she says, and points to ISAs as a great place to start, as they’re very simple and you don’t pay Income Tax or CGT on the interest or investment gains. ISAs are incredibly popular. More than 13 million UK adults paid into one in 2019/20, yet only around one in four chose the Stocks & Shares ISA option1.
“If ISAs are part of your plan for five to ten years or longer, your money has more potential to grow faster in a Stocks & Shares ISA than if you held it in cash,” says Underhill.
If you’re thinking about a comfortable retirement…
…you should make the best, and most appropriate, use of all available tax-efficient savings options, particularly your pension and ISAs.
For example, the current ISA limit is £20,000. But if you have a spouse or partner, you can each have an ISA, effectively doubling the allowance.
You can also invest up to £9,000 in a Junior ISA on behalf of someone under 18 if you are their parent or guardian. This can go a long way towards giving them a more secure financial future.
For your pension, you can generally pay in up to £40,000 or 100% of your relevant earning (whichever is lower) and claim Income Tax relief for this tax year. You can also carry forward unused allowances from the past three tax years, so use those if you can.
“ISAs are straightforward, but if they’re part of your longer-term plan, it’s important to invest your allowances wisely to make the most of the tax benefits,” says Underhill. “When it comes to pensions, there is a lot more to consider, and financial advice is critical to ensure you maximise the opportunities.”
The use-by date for all of the allowances above is the end of the tax year (5 April), so make sure you don’t leave it too late.
If you’re considering how to pass on your wealth…
…look at the tax-efficient options available to support other people in your family, now and in the future.
“Again, you need to think about the full spectrum of options because some have better tax implications than others,” says Underhill.
It’s important to understand the impact of Inheritance Tax, she says. This is a complex area, so it’s always worth seeking advice. The key aspect is that anything over the tax-free threshold is generally taxed at 40%.
This threshold starts at estates valued at £325,000, but could be higher – for example, if you’re passing a residence to direct descendants or if you’ve inherited IHT allowances from your spouse or civil partner.
However, you can act now, before the end of the tax year, to reduce how much could be taxed. A popular option is to start gifting money to your children and grandchildren. You can give away up to £3,000 a year, thereby reducing the value of your estate.
You could make these gifts into a Junior ISA, although a parent or guardian must set this up. Saving early means the power of compounding will build a child’s fund significantly over the long term.
Another option is to create a trust, such as an Asset Preservation Trust, whereby the death benefits from your personal pension go into a trust rather than direct to a beneficiary. This removes the benefits from your estate, with the beneficiary receiving payments from the trust.
Whatever your goals, the time is ripe to ensure you’re making the most of this year’s tax-saving allowances and reliefs. So contact a St. James’s Place Partner before 5 April for expert guidance.
The value of an investment with St. James’s Place will link directly to the performance of the funds selected and may fall as well as rise. You may get back less than you invest. An investment in equities does not provide the security of capital associated with a bank deposit account.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority
Any tax relief over the basic rate is claimed via your annual tax return.
1 Commentary for annual savings statistics, Gov.uk, June 2021