Savers and investors face an uncertain future amid volatile stock markets and record-low interest rates, on top of concerns about the health of family and friends. But with the end of the tax year upon us, experts urge people to make the most of their allowances.
The 2019-20 tax year ends on Sunday April 5, so FT Money has provided some last-minute tips for your end-of-year planning.
Claim higher rate tax relief on pension contributions
Prior to the Budget statement, there had been speculation that the chancellor would scrap higher rate tax relief on pension contributions. In the event, Rishi Sunak left the relief regime alone, so basic-rate taxpayers continue benefit from 20 per cent tax relief on their contributions, while higher-rate taxpayers enjoy relief at 40 per cent and top-rate taxpayers at 45 per cent.
Paul Falvey, tax partner at accountancy and business advisory firm BDO, said: “Given that pensions generate higher rate tax relief on 2019-20 contributions, now might be the time to put as much money as you can reasonably afford into your pension.”
He added: “With the market on a downward spiral in recent weeks, people will rightly be wary, but it is important to remember that contributions could go into a cash fund, which allows low risk saving.”
Pension savers can backdate claims from the three previous years if this benefit has passed them by.
Pay the maximum into your Individual Savings Accounts (Isas)
Savers and investors can put £20,000 tax free into an Isa before the end of the financial year.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “There are three golden rules to help you stay on track even when the investment world is as turbulent as it is right now: make sure you have a diverse portfolio; stick with it for the long term; and use your tax breaks, so that when we get an upturn, you’re in the best possible position to take advantage.”
FT Money Isa Guide 2020
UK residents aged 18 and over can invest up to £20,000 each and parents can fund a junior Isa or child trust fund with up to £4,368 per child for 2019-20 — making a tax-friendly total of £48,736 available for a family of four before April 6 2020.
If you have adult children who are planning to buy a home, it would make sense to gift funds to them so that they can invest in the new Lifetime Isa (Lisa), a savings vehicle available to those aged 18 to 40. Savers can invest up to £4,000 a year, to which the government will add a 25 per cent tax-free bonus of up to £1,000 a year.
Mr Falvey said “For the keen savers out there, using their full Isa limits for the family before end of tax year, including for kids, is essential. At a time when the stock market is volatile, cash Isas may become flavour of the month, as they are safe from stocks and shares fluctuations.”
Be ready for next year’s Isa allowance
Rather than waiting until the end of the next tax year to fund their allowances, given these unprecedented times, experts suggest investors might opt to fund their allowances at the beginning of the tax year to try to benefit from lower share prices and the recovery in equity markets that some are expecting to come when the pandemic subsides.
Ms Coles said: “There are lots of things we can’t control at the moment, but we can all make sure we take full advantage of our Isa allowances. The earlier you use your Isa allowance in the tax year, the better. Early birds and double dippers protect their investments from tax straightaway.”
Experts make the point that this approach gives you the opportunity to drip-feed your money into the market. You might put it all into cash within a stocks and shares Isa and buy into the market when it suits you.
Reduce your capital gains tax (CGT)
If your investment portfolio is down and your rate of CGT is unlikely to vary in the future, now might be the time to realise your paper losses on investments to crystallise them in 2019-20, said Mr Falvey.
“Losses can then be carried forward to use against taxable gains you make in future tax years,” he explained. “If you want to stay invested in the market for when it bounces back, while you cannot buy back the same stock within 30 days your spouse or Isa or trust can. Another option is to buy a different stock in the same recovery sector.”
Maximise gifts to family members
It is possible to make gifts of up to £3,000 in each tax year with the money instantly falling out of your estate for inheritance tax purposes. Couples can therefore give away £6,000 and if they have an unused allowance from last year they can make up to £12,000 worth of exempt gifts before April 6. Smaller gifts of up to £250 are also allowed to an unlimited number of individuals and will be free of inheritance tax.
Claim marriage allowance
This allowance remains available for married couples where one spouse receives earnings below the personal allowance of £12,500 and the other is a basic rate taxpayer.
Gary Smith, chartered financial planner at Tilney investment management, said: “One person is able to transfer up to 10 per cent of their tax-free personal allowance — that’s £1,250 — to their spouse.”
It can be worth up to £250 a year to some couples and you can back date claims to April 5 2015.
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