With just under a month to go before the new tax year starts on 6th April, time is running out to make the most of your tax allowances for 2020/21.
Here’s Magenta’s summary of the top 5 allowances and exemptions you and your family should consider taking advantage of before the end of the tax year.
Use your £20,000 Individual Savings Account (ISA) limit
ISA’s allow your savings to grow tax-free of income tax and capital gains. Whether you prefer to invest in cash because you are saving for something in the shorter term, or you are ready to commit your capital to investment over the longer term, the allowance is the highest it’s ever been and shouldn’t be ignored!
At Magenta, we know from experience that building up capital in ISAs over several years is a great additional way to save for your retirement and allow for maximum flexibility when it comes to your future lifestyle goals and planning. You can also consider maximising your child’s Junior ISA limit which is £9,000 this tax year, and don’t forget the Lifetime ISA (LISA) to buy your first home which has a limit of £4,000 and counts towards your annual ISA limit of £20,000.
You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both and you will receive a 25% government bonus (up to a maximum of £1,000)
Note: Remember a brand-new tax year and allowance will start on 6th April, so you can invest the same amount again very quickly, sheltering even more savings from tax.
Crystallise capital gains to your annual exemption
The capital gains annual exemption for 2020/2021 is £12,300. This is a ‘use it or lose it’ allowance; it cannot be carried forward to future years. It therefore makes sense to crystallise gains each year to the extent of the annual allowance, if and where possible.
Maximise your pension contributions – and perhaps your spouse’s or child’s
Pension contributions attract valuable tax savings, particularly for higher-rate tax payers. The tax relief will give any personal savings an immediate uplift of 20%, plus you may be able to claim more tax relief via your self-assessment tax return. That’s certainly a high return than you can get for your savings sitting in your bank account.
You can put up to £40,000 into your pension, including any employer contributions, for this tax year. If you had a pension but didn’t use your allowance in the three previous years, you can roll this over and make use of it now via ‘carry forward’ – but your contributions are capped at 100% of your earnings for this tax year. However, you should be aware that this calculation can be quite complex and will require professional advice, because making a mistake with this calculation can be costly.
You can also contribute up to £2,880 net into a pension for a spouse or child, irrespective of their earnings. This will be topped up by the government to £3,600 gross, owing to 20% tax relief.
Gifts to charity
If a higher rate or additional rate taxpayer makes a Gift Aid donation, further tax relief is available to the donor over and above the tax relief claimed by the charity. A Gift Aid donation of £80 is worth £100 to the charity. A higher rate taxpayer will qualify for further tax relief of £20, so the net cost of the donation is only £60. For an additional rate taxpayer, the further tax relief is worth £25, so the net cost of the donation is only £55.
You should keep a record of Gift Aid donations made in the year. Finally, remember that if you are not a UK taxpayer, you cannot claim Gift Aid. At Magenta, we consider these allowances as part of the bigger picture when helping you structure your finances in line with your lifestyle goals, helping you to plan for happiness and security in life.
Make Inheritance Tax (IHT) gifts
The Inheritance Tax (IHT) nil rate band is currently frozen at £325,000 until 5 April 2021. As part of your ongoing Inheritance Tax planning, full use should be made of available exemptions. The exemptions are relatively small, but over time the effect can be substantial and can help families with large IHT liabilities and especially when thinking about generational tax and financial planning.
Here’s some of the key exemptions:
- £3,000 Annual Exemption – An amount of up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised later that year.
- Small Gifts Exemption – You can give up to £250 to as many people as you wish each tax year.
- Gifts out of Income – If your income regularly exceeds your expenditure, you can give away the excess. To gain this relief, the gifts must be part of a settled pattern of giving or there must be evidence of the intention to make these gifts. It may be necessary to ensure that you have evidence demonstrating that the gifts have been made out of your post tax income.
- Lifetime Giving – A person may also consider making lifetime gifts in excess of the above exemptions. A person must survive such a gift by seven years for it to fall out of their estate entirely, and the donor must not benefit from the assets once they are gifted.
- IHT Efficient Investments – Another alternative can be to place funds into IHT efficient investments, for example, shares in qualifying AIM listed companies. Such investments benefit from business property relief and as such, are relieved from IHT after they have been owned for two years. Appropriate investment advice would be needed when considering such planning, as the commercial risk needs to be considered as well as the tax benefits.
In particular these exemptions are of use to families looking to pass on wealth regularly, in smaller amounts. This can help both the recipient, for example, helping pay for a holiday each year or pay more off their mortgage and the donor, buy reducing their overall estate but without giving away a significant amount of money outright in a lump sum.
Magenta Financial Planning is authorised and regulated by the Financial Conduct Authority.