Jonathan Watts-Lay outlines top saving allowances to utilise before the end of the tax year.
The end of the tax year is in sight, so now is a great time to have a good look at your finances and make sure you are making the most of this year’s savings allowances and maximising your saving potential.
In light of this, below is a list of top saving allowances to utilise before the tax year end, as well as those to take advantage of in the new tax year.
Before 5 April 2019
Isa: the obvious end of tax-year consideration is the Isa. The limit is now £20,000 and any interest or capital gains are tax free, but it must be used before 5 April.
Pension top up: pension funding is incentivised by generous tax benefits. Additionally, defined contribution pensions will not be included in your estate, which can be beneficial for inheritance tax purposes. As a consequence, pension saving is attractive not only to those approaching retirement but also as part of an inheritance tax planning strategy. However, it is important to ensure that you aren’t going to breach the Annual Allowance with any additional contributions.
Carry forward: the Annual Allowance is the amount of savings that can be built up in a pension and receive tax relief each year. Unused allowances can by carried forward for up to three years (subject to certain qualifying criteria), and therefore unused allowance from 2015-16 will be lost from 5 April 2019.
The Annual Allowance for the current tax year is £40,000, which includes all your personal and employer contributions across all your pension schemes. It has been unchanged for the past three years, so there may be quite a bit of allowance still unused. However, if your income is more than £150,000, then your Annual Allowance could be reduced on a tapered basis.
Gifts: it is possible to gift up to £3,000 in each tax year without incurring an inheritance tax charge, and the allowance can be carried forward a year if it isn’t used, making it possible to give £6,000 before the end of this tax year if it wasn’t used last year. A husband and wife could therefore gift up to £12,000.
After 5 April 2019
Starting rate for savings: if your earned income (not income from savings) is £12,500 a year or less, you have an additional £5,000 allowance for savings income. With an interest rate of 0.5%, someone could have as much as £1 million in a savings account and still have no tax to pay on the interest earned.
Personal Savings Allowance: the PSA allows basic rate taxpayers to earn up to £1,000 of income from savings tax free (e.g. interest on bank accounts or interest on gilts/corporate bonds).
Higher-rate taxpayers can earn up to £500, but additional-rate taxpayers are not entitled to the allowance. Given the present low level of interest rates, if a basic-rate taxpayer is earning a rate of 0.5% on their savings, they could have as much as £200,000 invested and receive interest tax-free.
Dividend Allowance: the allowance means that shareholders don’t have to pay tax on the first £2,000 of dividend income. Dividend income above £2,000 is taxed at 7.5% for a basic-rate taxpayer, 32.5% for higher-rate taxpayers and 38.1% for additional rate taxpayers.
Lifetime Isa (Lisa): for those saving for their first home, the Lisa is a serious contender to be considered. It provides a guaranteed 25% government bonus, so while interest rates may be low, the bonus is very attractive.
It is unlikely that first-time buyers will have a large amount of money to pay in before the end of the tax year, but it may be a good idea to start paying in monthly as soon as possible in the new tax year.
In the current low interest rate environment, it is important to make your money work hard and be as tax-efficient as possible.
The first thing to do is to think about what you are actually saving for, and then prioritise your decisions with this in mind.
The decisions of a first-time buyer will be different from those of someone approaching retirement, and different again from someone wanting to minimise inheritance tax.
It’s all about making your money work harder against the objectives you have.
Jonathan Watts-Lay is director of WEALTH at work, a specialist provider of financial education and guidance in the workplace supported by regulated advice for individuals.