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Thursday, 07 July 2022 12:29

Personal tax planning tips for year end

There is now less than a month until the end of the tax year. Read our guide on what to consider before the 5 April deadline.

1. Maximise free government money

Whether it’s your pension, your Lifetime ISA or ensuring you claim tax breaks that you are eligible for, it’s important to get as much free government cash as you are entitled to.

Pensions benefit from tax relief at 20% for basic rate taxpayers, but higher and additional rate payers can reclaim an additional 20% or 25% tax relief respectively through their tax return. That means for a basic rate taxpayer every £1 in your pension only costs you 80p and for a higher rate taxpayer every £1 in your pension only costs you 60p.

Anyone using a Lifetime ISA can also get up to £1,000 of free money from the government each year, if you put in the maximum £4,000 contribution, bearing in mind that the age limit to open a Lifetime ISA is 39 years.

Just be aware that you can withdraw Lifetime ISA money once you’ve reached age 60 or earlier to buy your first property, but if you take the money out for any other reason (apart from severe ill health) there is an exit penalty of 25%.

It is also worth checking that you are claiming any government tax-breaks that you are eligible for, such as the marriage allowance or tax-free childcare, which gives a 20% top-up to money you use for childcare.

2. Use your ISA and pension annual allowances

ISAs and pensions are a great way to save for the future because any income and capital gains made on investments held in both are free from income tax and capital gains tax.

Everyone over the age of 16 can save £20,000 each year in a cash ISA and anyone over the age of 18 can save the same amount in a Stocks and Shares ISA. Those aged 18 to 39 can open a Lifetime ISA and save up to £4,000 each year.

The crucial thing with ISAs is if you do not use all the allowance it cannot be carried forward to future tax years, so you lose it for good. Investors with spare money they plan to save and any unused ISA allowance for this year should consider using it before the 5 April deadline.

The pension annual allowance for this tax year is £40,000 or 100% of earnings if that is lower - this includes both contributions made by you and your employer. The annual allowance can be carried forward for up to three years, so investors should consider whether they have made as much use of their pension annual allowance as possible ahead of the end of the tax year. Note that anyone with a very high income or who has already started to take taxable income from their pension will have a restricted annual pension limit.

If you want to carry forward any previously unused pension allowance, you will only get tax relief on personal contributions up to 100% of your earnings for that year. People with no earnings (including children) can still save up to £3,600 a year in a pension (including basic rate tax relief).

3. Shelter more of your investments from tax

If you’ve got investments outside of your ISA you can use something called ‘Bed and Isa’ to funnel them into an ISA and protect them from tax. You need to check you have got some of your £20,000 ISA allowance left, and then use your investment platform’s Bed and ISA service, which means the investment outside of the ISA is sold, the proceeds moved into an ISA and used immediately to purchase the same investment within the ISA.

You just need to be aware that if you’ve made any gains on the investment outside an ISA you may have to pay tax on them when you sell them as part of this process. For this reason, lots of people sell enough of the investment to take them up to their capital gains tax free allowance of £12,300.

4. Use your capital gains allowance to cut your future tax bill

Any investments held outside an ISA or pension will be subject to capital gains tax (CGT), which means the annual tax-free allowance is very valuable. Investors can make investment gains of up to £12,300 in 2021-22 without paying any tax.
Gains over that amount are added to income and if they fall in the basic rate tax band are taxed at 10% and at 20% for the higher rate tax band. An additional 8% is added to the tax rate if the gains are from a second property.

The annual capital gains tax-free allowance cannot be carried forward into future years so if you do not use it, you lose it. If you have investments with gains outside of an ISA or pension you should consider whether to realise some of that gain before the end the tax year to make the most of your tax-free allowance.

If you’re in a couple you can get double this allowance as you can transfer investments to your spouse to use their annual CGT allowance too. This means that for the current tax year you can lock-in up to £24,600 of gains before you face any tax.

5. Beat the dividend tax rise with your ISA

People with lots of income-producing investments outside an ISA or pension will face a higher tax rate this year, if they earn more than £2,000 in dividends in a tax year. That is because the dividend tax is rising, with an extra 1.25% being added to all the tax rates, regardless of the level of dividend tax you pay.

That means any dividend income above this amount is taxed at 8.75% for a basic rate taxpayer, 33.75% for a higher rate taxpayer or 39.35% for additional rate taxpayers. Someone with £10,000 of dividends outside an ISA will pay an extra £100 a year in tax as a result.

This means that it is more beneficial than ever to put your income-producing investments inside an ISA, to protect them from tax. You can use the bed and ISA process to move assets into an ISA, but if you have too many investments to move them all in one tax year you should prioritise the ones paying the highest amount of dividends.

6. Set up regular investing – to take the hassle out of saving

Lots of people have a to-do list as long as their arm, meaning there is inevitably stuff you don’t get around to doing. But if you set up regular investing that ticks something off and takes the hassle out of saving money each month.

You can easily set up a direct debit that will automatically transfer the money into your investment account each month (maybe on payday) and then set up regular investing on your platform, which will automatically buy the funds or shares you’ve chosen.

Many investment platforms will allow you to start from as little as £25 or £50 a month. You can always pause it one month if you need to skip a month, but it means you don’t have to actively log-in and invest money every month. What’s more it can help to smooth out any short-term volatility. If stock prices fall, you are investing at that lower price and could benefit even more over the long term if prices rise.

7. Set up automatic dividend reinvestment

Any dividends from investments in your ISA can be withdrawn tax-free, but if you don’t need the income now you could use them to turbo-charge your returns. If you reinvest them, you can buy more shares in the same investment, which can have a dramatic impact on the size of your ISA fund over the long term.

This is because when you buy more shares each time you receive a dividend, you then receive more dividends next time there is a payout, which can then be reinvested again and so on. Some investment platforms allow you to set this up to happen automatically.

Let’s assume someone invests the full ISA allowance of £20,000 and we assume a compound annual growth rate of 5% and annual dividend yield of 4% a year. The initial £20,000 will be worth £53,066 after 20 years, and on top of that £26,453 would also have been banked in cash dividends, to give a total return of £79,519.

However, an investor who reinvests the dividends rather than banking them would have £112,088 – more than £32,500 extra. The figures become even more attractive over longer periods:

Last modified on Tuesday, 04 October 2022 11:50



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