The clock’s ticking to shield your savings and investments from the taxman for the 2016/17 tax year, which ends on Wednesday 5 April. But if you’re quick, there’s still time to to take advantage of tax relief that could save you thousands of pounds. Here’s a reminder of the key allowances to make the most of before they disappear – and what the experts have to say about them.
‘You should look to maximise your pension contributions before the end of the tax year,’ says Patrick Connolly, a certified financial planner at Chase de Vere. ‘Pension contributions benefit from initial tax relief at somebody’s marginal rate of income tax. This is particularly beneficial for higher and additional-rate income taxpayers who will benefit from a boost of 40 or 45 per cent to what they pay in.
‘There can be other benefits of making pension contributions including pushing your overall net income below a level which protects your personal income tax allowance, which reduces for incomes over £100,000, or entitlement to child benefit, which reduces for incomes over £50,000 a year.’
Tom Selby, senior analyst at AJ Bell, adds: ‘Anyone who has flexibly accessed their pension benefits using the pension freedoms is restricted to making contributions to money purchase schemes for tax relief purposes of £10,000 a year. (This is known as the Money Purchase Annual Allowance or MPAA.) However, the government has confirmed it is reducing this limit to £4,000 from 6 April 2017. People who have triggered the MPAA should therefore consider making a contribution of up to £10,000 in this tax year before the limit is lowered.’
Selby also reminds retirement savers that this is the last chance to carry forward £50,000 of pension annual allowance. He explains: ‘The 2013/14 tax year was the last year to have a pension annual allowance of £50,000. People who have not used this already have until 5 April 2017 to get a contribution into their pension or the opportunity is lost forever. This is particularly valuable for high-income individuals who may have an annual allowance as low as £10,000 in the current tax year under the tapered annual allowance rules.
‘In order to use carry forward, the current year’s annual allowance must first be used. So, in 2016/17 savers must first use the £40,000 annual allowance before going back to 2013/14 to mop up any unused allowance from that year. Those affected by the taper only need to use their tapered annual allowance from 2016/17 before having the ability to go back and use unused allowance from 2013/14.’
And Selby also urges pension savers to remember that this is the last chance to apply for Individual Protection 2014. ‘In 2014 the Lifetime Allowance dropped from £1.5 million to £1.25 million. In 2016, it went down further to £1 million. Individual Protection 2014 protects the investor’s fund value as at 5 April 2014 from the Lifetime Allowance charge up to a maximum of £1.5 million. It is still possible to apply to HMRC for this protection, but only up until 5 April 2017,’ he says.
‘With Individual Protection 2014 it is still possible to make contributions without revoking the protection, so it may still be suitable even for people who have built up pension benefits in the last three years.’
Until early next month, you can save or invest up to £15,240 across any combination of ISAs (Individual Savings Accounts) you see fit – including cash, stocks and shares and innovative finance accounts. Any interest earned or returns made can be taken completely tax-free.
If you plan to use any of your unused allowance in a cash ISA, you need to get your skates on as the deadlines for opening new accounts for the 2016/17 year are looming. For example, the Britannia Fixed Rate Cash ISA paying 1.05 per cent (fixed until 5 April 2019) can only be opened by new customers until Wednesday 29 March and applications must be made in branch. The deadline for opening the account online has already passed.
Last year, investment manager Fidelity International’s most popular day for stocks and shares ISA investing was Monday 4 April, just one day before the deadline. And while it’s certainly better to use up your 2016/17 allowance before you lose it, analysis by the company has found that early-bird investors have done better than those leaving it to the last minute over the past 15 years. Had you invested a lump sum of £1,200 in the FTSE All Share at the end of each tax year since 5 April 2003 you’d be left with a pot of £25,969.60 after 15 years, the research found. But had you regularly invested £100 every month at the start of each tax year since 6 April 2002 for the same period of time, you’d now have a pot of £27,363.12 – a difference of £1,393.52.
Maike Currie, investment director for personal investing at Fidelity International, said: ‘When investing, time really is a powerful factor. By starting at the beginning of the tax year, you give your money an additional 12 months to benefit from the magical power of compounding – that “snowball” effect of building new investment returns on the investment returns you’ve already achieved.’
Patrick Connolly also suggests that those who have made capital gains with their investment portfolios outside of tax-efficient wrappers (such as ISAs), or other assets, ‘could consider realising some gains before the end of the tax year to utilise their annual capital gains tax allowance of £11,100’. This allowance cannot be carried forwards if it is unused. He points out that spouses and civil partners both have an annual capital gains tax allowance and so could protect up to £22,200 of gains between them each tax year, ‘especially as assets can be transferred between them on a no-gain, no-loss basis’.
Don’t forget you can make use of the inheritance tax gift allowances in the current and next tax year. Connolly explains that while the £3,000 annual exemption can be carried forward for one year, any unused allowances prior to this are lost. ‘There are other gift exemptions that can be utilised, including the £250 small gifts exemption whereby gifts up to this amount can be made to an unlimited number of people,’ he says.
And Elliott Wilson from Matrix Financial Limited adds: ‘Don’t forget to ask your elderly parents to use any unused annual ISA allowance for an AIM ISA, which become inheritance tax exempt after two years.
‘A portfolio of AIM shares held within an ISA will not only mitigate an IHT liability but will also offer tax-free dividends and capital growth.’
He adds: ‘All of the annual ISA allowance can be used for this (£15,240) before the tax year ends on 5 April, then another deposit of £20,000 deposit could be made from 6 April (using next year’s allowance) and would result in £35,240 IHT exempt in a little over two years from now.
‘And if an ISA holder dies, a surviving spouse or civil partner is able to ‘inherit’ the tax benefits.’
Laura Whitcombe is knowledge and product editor at ThisisMoney.co.uk.