Tax year end – are you ready?
Rachel Mason is public relations manager at independent financial service providers Fair Investment Company.The opinions expressed are her own. Reuters will host a “follow-the-sun” live blog on Monday, March 8, 2010, International Women’s Day. Please tune in.–
With the end of the tax year fast approaching, now is the time to make sure all your finances are in order and that you are maximising all the annual allowances, reliefs and exemptions available.
Make the most of your ISA allowance – aged 50 and over, you’ve got an extra 3,000 pounds!
You can’t carry your ISA allowance over into the next financial year, so if you haven’t made the most of it – use it, or you’ll lose it. The current limit is 7,200 pounds – all of which can be invested into a stocks and shares ISA or up to 3,600 pounds can be invested into a cash ISA with the remainder in stocks and shares.
But for those aged 50 and over, the limit is £10,200, £5,100 of which can be invested in a cash ISA. This new limit, which came into force in October 2009, will be extended to all other ISA investors from April 6th 2010.
If you haven’t used your allowance, now is the time to do it, especially as Easter falling early means the last working day of the tax year is actually April 1st. Cash rates are pretty awful at the moment so it is worth looking at the range of stocks and shares ISAs available – choose from income or growth or a combination of the two, paying close attention to the level of risk you are willing to take.
If you have already used your ISA allowance, but want to improve the administration, performance, fund range, or charging structure, you can still do an ISA transfer. If you have a stocks and shares ISA you can transfer into another stocks and shares ISA, if you have a cash ISA, you can switch to another cash ISA or you can transfer into a stocks and shares ISA. But, once you have moved a cash ISA into stocks and shares ISA, you can’t move it back.
One half of a couple? Invest in the name of the one who pays the least tax
If your husband or wife doesn’t work, they don’t pay tax, and you can take advantage of this by transferring some of your non-ISA savings to them. You can earn up to £6,475 a year before you have to pay any tax, which means that instead of you paying the tax on your savings, you can let a non-working or low earning spouse earn the interest, tax free! For people aged 65 or over, the annual personal allowance is £9,490, so make sure you work out the -most tax-efficient way to invest, based on earnings and age.
Remember though, if you are going to deposit your savings into your non-tax paying partners’ savings account, make sure they register as a non-tax payer so that interest can be earned before tax is taken, otherwise you will be taxed on any interest earned on the account.
If you are both tax payers, but one of you is in the higher rate tax band, hold savings in the basic rate tax payers name; for every 1 pound interest received from a savings account, a non tax payer receives £1, a basic rate tax payers receives 80 pence and a higher rate tax payer receives 60 pence.
You should note that dividends from shares are received net of a 10% tax credit which satisfies the tax liability for basic rate tax payers. Higher rate tax payers are subject to 32.5 percent tax on dividends and non-tax payers cannot reclaim the 10% tax-credit.
Contribute more to your pension
Tax relief on pensions basically depends on whether you pay into a company or personal pension scheme. With a company pension scheme, your employer usually takes the pension contributions from your pay before deducting tax so that you only pay tax on the remainder of your salary. So whether you pay tax at basic or higher rate you get the full relief straightaway.
If you have a personal pension, you will pay income tax on your earnings before you make any pension contribution, but your pension provider claims tax back from the government at the basic rate of 20 percent. This means that for every 80 pounds you pay into your pension, you actually get 100 pounds in your pension pot. Any higher rate tax-relief due is reclaimed via your tax return or tax code.
You can get tax relief of up to 100 percent of your earnings (salary and other earned income) each year (as long as you make the contribution before age 75).
There is an annual allowance though – for the current tax year, it is 245,000 pounds; you pay tax 40 percent tax on any contributions you make that are above the annual allowance.
At present even non-taxpayers receive basic tax relief on pension contributions of up to 3,600 pounds per annum, resulting in a net contribution of 2,880 pounds. This can make it attractive to make contributions on behalf of a non-tax paying spouse, children or even grandchildren.
Reduce capital gains tax
The capital gains tax (CGT) allowance is currently 10,100 pounds per year, so if the value of your realised investment gains has exceeded this amount, you will have to pay tax on them at a rate of 18 percent.
It is worth noting that each individual receives the annual allowance so it may be worth gifting exisiting investments to a spouse to utilise their exemption.
If gains on your investments have not reached this level, you could consider selling any shares or units you hold to crystallise any gain and use your allowance, which could help you reduce any tax payable in the future (but make sure you don’t reacquire them within 30 days of disposing of them). To avoid further tax on them in the future, you could re-buy them within a SIPP or ISA wrapper. However, please note that even though this is a tax-efficient strategy there may be a period when your investments are out of the market.
You can also offset any losses on your investments against any capital gains on others and losses can be carried forward indefinitely.
However, if you are a higher rate tax payer – 40 percent (rising to 50 percent from 2010), paying capital gains is better than paying income tax. So, after you have used your tax free allowance, it may be worth investing in products where most of your gains will be subject to capital gains tax rather than income tax. Although, keep in mind that CGT is predicted to rise next year.
Give gifts to your loved ones to avoid inheritance tax
The IHT threshold is 325,000 pounds per individual and 650,000 pounds for married couples or registered civil partners, as any unused IHT threshold is passed to the the second spouse or civil partner on first death.
A According to the Halifax the average house price increased 3.6 percent in the 12 months from January 2009, however the average price is 170,000 which is still much lower than the market peak.Even with lower average house prices with other assets factored in, there are potentially lots of families facing tax bills if their nearest and dearest die. Although you can’t avoid IHT altogether, there are ways of reducing it.
For example, each year you can give away 3,000 pounds, and unlike other tax rules, you can carry it forward (only for one year though) if you don’t use it within the tax year.
You may also make unlimited small gifts of 250 pounds per person and can give away any amount of your income regularly to someone else, as long as giving the money does not affect your standard of living.
Other gifts you can make include up to 5,000 pounds to a child who is getting married or entering a civil partnership.
It is also worth noting that any lifetime gifts given over 7 years prior to death are not subject to IHT and any gifts within 7 years of death are subject to taper relief.
There are ways of mitigating IHT, by using life cover, trusts and investing in AIM shares. However, this is a complex area and independent financial advice should be sought.