Checklist for the new tax year

The new tax year began on 6 April. This has a number of implications for the various forms of tax relief and allowance from which you could benefit.

Any allowances that you used up in full during 2018/19 have now been reset and you can begin using them again.

But what if you did not use them in their entirety? In some cases you may be able to carry unused allowances forward and add them onto this year’s total while, in other cases, what’s gone is gone.

Tax relief can be, if used appropriately, an important contributor to overall investment performance. Market returns are uncertain and potentially volatile but a legitimate 20 or 40 per cent tax saving is absolute.

Pension contributions

The annual allowance for total contributions to UK pension schemes from all sources (including employer contributions) is currently £40,000 for most people. Some people who have started drawing benefits from a defined contribution pension have a lower figure, as do those with very high earnings.

Contributions above the annual allowance suffer a tax charge.

If you used up your entire annual allowance last year then you can begin contributing again now. If you did not use your full allowance last year, or in either of the two tax years before that, you may be able to carry them forward to make a substantial pension contribution this year.

This article has more information about how you can “carry forward” your annual pension contribution allowance.

ISAs

Money invested in ISAs does not incur capital gains or income tax on any investment growth or bank interest. This makes ISAs a popular choice for investors who want to benefit from tax-efficient growth but also have the flexibility to access their money when they need it.

The amount that individuals can pay into an ISA is subject to an annual limit. In 2019/20 this limit stands at £20,000 per individual for a mainstream ISA.

The ISA subscription limit is a “use it or lose it” allowance. If you did not use your whole allowance last year you cannot carry the remainder forward to add to this year’s limit.

Prest Financial Planning recently wrote this article about ISAs for What Investment. It explains the rules governing these investments, and the different types of ISA that are available, in some depth.

Capital Gains Tax

Investments in ISAs or pensions are exempt from Capital Gains Tax (CGT) but most other investments are subject to CGT when you “crystallise” a gain (e.g. when you sell an investment at a profit).

It is important to remember that CGT is only charged on the value of the gain. If you bought an asset for £100,000 and sold it for £110,000 you would only pay CGT on the £10,000 increase in value.

Individuals each have an annual “use it or lose it” exempt amount for gains that can be crystallised before any CGT is payable. In 2019/20 this is £12,000 per individual (different rates apply to trusts).

Assets can be transferred between spouses and civil partners without triggering a capital gain on transfer. This means that, with proper planning, couples can crystallise gains of £24,000 per year before any tax is due.

Gifts to minimise Inheritance Tax

Individuals can each give away up to £3,000 in any one tax year and it will immediately fall outside their estate for the purposes of calculating Inheritance Tax (IHT). This allowance can be carried forward by one year, as long as the current year’s allowance is also fully used (so if you made no gifts last year you could give away up to £6,000 this year).

Additional annual allowances exist for wedding gifts, and you can also make unlimited smaller gifts of up to £250 per beneficiary. Larger gifts may potentially become exempt from IHT after seven years; this article has more information.

If you would like to discuss the best ways to make the most of your tax allowances and reliefs please do not hesitate to speak to your financial adviser at Prest Financial Planning.

Please note that although Financial Conduct Authority regulates advice relating to the investments and financial products described above it does not regulate tax planning advice.

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