We’re not far away from the end of another tax year, so with many allowances being “use it or lose it”, what are the key things you need to think about before 5th April?
Invest in your ISAs!
Individual Savings Accounts (ISAs) allow your savings to grow free of income tax and capital gains tax. Additionally, there is no tax to pay on withdrawals from them, making ISAs a great option for long term savings and providing future flexibility to fit around your plans.
The ISA allowance for this year is £20,000 and there are various types of ISA available – with the main two being Cash (better for short term savings) or Stocks & Shares (for longer term growth).
Don’t forget if you are saving for your first property purchase and under 40, its worth considering the suitability of the Lifetime ISA too. You can read more about this here:
www.magentafp.com/lifetime-isa
Any unused ISA allowances cannot be carried forward to future tax years, so it is a ‘use it or lose it’ situation!
Pay into Pensions!
Personal pension contributions benefit from basic rate tax relief at 20%, meaning that for every 80p you pay in, the value is topped-up to £1 by the Government.
For higher and additional rate taxpayers the benefits can be even higher, with further tax relief claimable via your self-assessment tax return.
Pension contributions are generally capped by the Annual Allowance, which is £40,000 for 2021/22; however, your individual circumstances can have a significant impact on the maximum amount that you can pay into a pension each tax year.
In some cases, you can pay in more than £40,000 – up to 100% of your salary – whereas others may be limited to a reduced Annual Allowance of £10,000.
Making a mistake when contributing to a pension can be costly, so get in touch if you would like some assistance with this.
Boost those Baby Savings!
If there are children in your family, you can also consider investing into Junior ISAs (JISAs) and Pensions on their behalf, so long as a parent or guardian sets the account up initially.
The current JISA allowance is £9,000 and JISA savings will become available to them at age 18.
A child can also receive pension contributions of up to £2,880 (£3,600 after tax relief) – irrespective of their earnings – although they’ll have to wait much longer to get the money!
Crystallise those Capital Gains!
If your investments have done well and you’re sitting on some sizeable gains in your portfolio, it may be worthwhile considering making use of your annual Capital Gains Tax (CGT) exemption.
The CGT exemption for the 2021/22 tax year is £12,300, meaning that you can crystallise gains (or make a profit) up to this amount without incurring a tax liability.
Using your CGT exemption regularly can help to “flush out” gains in your portfolio over time, so that you don’t end up paying significant amounts of tax if you need to make any large sales in future.
Much like the ISA allowance, the CGT exemption is ‘use it or lose it’.
Eliminate that Inheritance Tax!
If your total estate is currently over the Inheritance Tax (IHT) threshold, there are some actions you can take each year to mitigate the impact of IHT over the long term.
Each tax year you have an annual gift exemption of £3,000, which you can give away without any IHT consequences. If you do not use it, it can be carried forward – but only for one year.
You can also make small IHT-exempt gifts of up to £250 to as many people as you wish, as well as regular gifts out of income – so long as there is an established surplus.
Some larger IHT-exempt gifts can be made on special occasions such as weddings, so let us know if there are any exciting events on the horizon!
Of course, you can always give away larger sums up to any amount, but then you will have to wait for 7 years for them to fall outside your taxable estate.
If you would like to talk about any of these allowances and exemptions in more detail, please contact us and we will be happy to help. Hurry though, the clock is ticking!