The new tax year started on 6 April, so now is the time to review your finances to make sure your money is working as hard as possible for you. Here are four things to do before the end of the current tax year.
1. Use your Isa allowance
Savers have until April 5th to make use of their ISA allowance for the current tax year. The amount you can invest into ISAs resets at the end of the tax year and there is no way of carrying over your allowance to next year. If you fail to use it, you lose it.
If you are a UK resident aged 18 or over, you can invest up to £20,000 this tax year (2018/19). You can choose how you split this – either between one stocks and shares ISA and one cash ISA, or you can put the whole lot into either type.
Those aged 16 and 17 also have a £15,000 ISA allowance, but may only put it into a cash ISA. Parents can also put up to £4,000 into junior ISAs for each of their children under the age of 18.
2. Use your capital gains tax allowance
Everyone has an annual capital gains tax (CGT) allowance – £11,700 in the current tax year (2018/19). This means you can sell or otherwise dispose of assets such as property, stocks and shares, and other valuables worth over £6,000 without having to pay any tax on the first £11,700 of gains. (You do not have to pay CGT on certain assets including gains from your main home, car, ISAs and pools winnings.)
But you can’t carry one year’s exemption to another. So if, for example, you plan to dispose of shares that will make you gains of, say, £20,000, you could make use of your CGT allowance by selling them in two batches, either side of the end of the tax year.
Married couples and civil partners should also think about transferring assets between them to minimise their tax liability on future capital gains. The CGT allowance is an individual one, so married couples and civil partners can shelter up to £23,400 of gains between them if they share out their ownership of joint assets to each make use of their allowance.
The golden rule when switching assets between spouses or civil partners, however, is that any transfer must be outright and unconditional – in other words, a genuine gift with no strings attached.
3. Keep your child benefit
Lots of families have already been hit by the “High Income Child Benefit charge”, which was introduced in 2013. Under this regime, child benefit is clawed back if either you or your partner have an adjusted net income of more than £50,000. Adjusted net income means your total taxable income (ie basic salary plus any benefits in kind such as a company car or private medical insurance, and any savings, dividend or rental income) minus things such as pension contributions and charitable giving.
The clawback is at the rate of 1% of the amount of child benefit for every £100 of income over £50,000, so when you’re adjusted net income hits £60,000, you effectively lose all the benefit.
The most obvious way to reduce your adjusted net income, if you can afford it, is to pay more into your pension scheme, this will not only bring down your adjusted net income but will also extend your basic rate tax band, so you get more with lower tax!
Other ways of reducing your taxable income include agreeing with your employer to sacrifice some salary for tax-free benefits (these schemes often involve things such as childcare vouchers) and giving more money to charity.
4. Reduce your inheritance tax bill
If your estate, including your home, is likely to be hit by inheritance tax (IHT) when you die and you can afford to give some money away to loved ones now, then do it.
IHT is currently paid if someone dies leaving an estate worth more than £325,000. The tax is charged at 40% on anything above this threshold, so reducing the value of the part of your estate that is above the £325,000 threshold – also known as the nil rate band – will reduce the IHT payable when you die. One way to do this is by using your annual exemption, which allows you to give away £3,000 worth of gifts a year without being liable for IHT.
You can carry over any leftover annual exemption from one tax year to the next, but the maximum exemption in one year is £6,000. On top of that, you can make small gifts of up to £250 each to as many individuals as you like. Also, there is no tax on wedding or civil partnership gifts worth up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
Another important point is to check your Will to make sure that you will benefit from the Residence Nil Rate band which has gone up to £125,000. The Residence Nil Rate band was introduced in 2017, it gives an additional allowance which can be offset against the value of your home, as long as the property is passed directly to your beneficiaries.
If you have queries or questions about any of the topics in this blog please leave a comment or contact us here.