Isa and pension deadlines: Five pitfalls to avoid

The end of the tax year is fast approaching and with it comes the usual last-minute rush to top up Isas and pensions. 

As the saying goes, you need to ‘use it or lose it’, so the clock is ticking to take advantage of this year’s Isa allowance, which allows savers and investors to shelter a maximum of £20,000 from the taxman. In the case of pensions, tax relief of up to £40,000 is available.  

Below Money Observer rounds up five potential problems to avoid when filling out those last-minute applications. 

Know the deadlines 

It sounds simple, but those who are unaware of their broker’s deadlines may fail to make the most of the annual allowances. Certain brokers, including our sister website Interactive Investor, allow online applications, either for existing Isas or to open an Isa account, to be made up until 23:59 on 5 April. 

Other brokers may have earlier deadlines, however, so it is important to check. In the case of postal applications it makes sense to get the forms filled out as soon as possible, perhaps a week or so ahead of the tax year end. Again, it is worth asking your broker what the deadline date is for postal applications to be received. 

Bed and Isa 

If you are not in a position to allocate new cash to your Isa this year, you can still take advantage of the allowance by moving existing taxable holdings into the wrapper.  The process, known as 'bed and Isa' or 'bed and Sipp', involves selling enough of your investment to realise gains up to the value of the capital gains tax exemption (£11,300 for the 2017/18 tax year) and then buying them back within your Isa or Sipp, or that of your spouse.

However, you need to be aware that there may be transaction charges involved and there may be a period when your money isn't invested. Some brokers offer a ‘Bed & Isa’ option when you come to sell; if you tick the box, your holding will be sold and instantaneously rebought within your Isa, minimising the risk of price moves when you’re out of the market. 

Don’t know where to invest – here’s the solution 

With time running out and a bewildering number of investment choices available, it can be difficult to decide where to invest. But don’t make the mistake of not doing anything and waiting until after the April 5 deadline to make a decision. 

Instead, simply pay the cash into a stocks and shares Isa account to avoid wasting your annual allowance. You can then invest later when you have made your choice. 

Lower your exposure to dividend tax

The 2018-19 tax year comes with fresh Isa and pension allowances, but it also comes with a reduced dividend allowance, falling from £5,000 to £2,000. Dividends above the £2,000 threshold will be taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers.

There are various ways to beat the dividend tax cut, as we have previously outlined. But the simplest way is to move ‘unwrapped’ holdings into an Isa or pension wrapper.  

Rachel Winter, senior investment manager at Killik & Co, adds: ‘Look at what you have in and outside your Isa and see if you are going to be affected by this reduction in the dividend allowance – if you are, see if you can reshuffle your investments to lower your exposure to income tax.’ 

Have paperwork to hand

If you are leaving the online applications to the last minute, do a little bit of preparation in advance by ensuring your bank details and national insurance number are to hand.   

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