The end of the tax year is a good opportunity to check that you aren’t paying more tax on your savings and investments than you need to.
Here, we look at three ways you could potentially maximise returns, and three you may want to steer clear of.
Tax rules can and do change and their effect on you will depend on your individual circumstances. Smart Investor doesn’t offer personal tax or financial advice. If you’re unsure, seek independent advice.
Do consider your ISA allowance
One of the most tax-efficient ways to invest is through an individual savings account (ISA), which can hold a wide range of investments, including cash, funds, shares, gilts and bonds.
You have an ISA allowance of £20,000 in the 2019-20 tax year – this can be split between cash, investment, innovative finance or lifetime ISAs.1
There’s no income tax, tax on dividends or capital gains tax to pay on any gains from investments held in an ISA.
It’s worth noting, however, that if you invest outside an ISA, you won’t necessarily have to pay any tax, as longs as your dividends don’t exceed the dividend allowance, or any interest from cash, funds, gilts or bonds aren’t higher than your personal savings allowance. You also have a capital gains tax (CGT) allowance for each tax year, currently amounting to £12,000 for the 2019-20 tax year.
Find out more about your tax allowances
Do decide whether you want to top up your pension
Consider boosting your pension before the end of the tax year. If you’re employed and contribute to a company pension, check how much you’ve paid in. Many employers will match contributions up to a particular cap, so it’s worth taking advantage of this.
The more income tax you pay, the greater the tax relief on pension contributions. If you’re a basic rate taxpayer, for every £800 you pay in, the taxman will top it up to £1,000, while if you're a higher or additional rate taxpayer you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your tax return.
For most people, tax relief is available on pension contributions of up to £40,000 per tax year, or 100% of your income, whichever is lower. Your annual allowance will be tapered if you earn more than £110,000 and your income and pension contributions made on your behalf exceed £150,000.2 Even if you don’t pay tax, you’re still entitled to receive basic rate tax relief on pension contributions. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you include the available tax relief.
The minimum pension age you can access your private pension savings is currently age 55. However, the Government have announced an intention to link this age to 10 years prior to the State Pension Age. If this passes into law, the minimum pension age will increase but bear in mind that these pension tax rules can change in future and their effects on you will vary depending on your personal circumstances.
Do remember your Capital Gains Tax allowance
You have an annual CGT allowance of £12,000 in the 2019-20 tax year. This means in the current tax year you can sell shares and investments, property and other assets without having to pay any tax on the first £12,000 worth of gains.3
So, for example, if you’re planning on selling shares that you’re going to make £15,000 worth of gains from, you could make use of your CGT allowance by selling them in two batches, during this and the next tax year.
Bear in mind you do not pay CGT on assets held in a pension, ISAs, or your main home.
Don’t open two of the same types of ISA in one tax year
As mentioned, ISA rules mean you can split your allowance across a combination of different types of ISA.
However, you’re not able to open two of the same type of ISA, so you couldn’t pay into two cash ISAs within the same tax year, for example.
Don’t assume you have to invest your ISA allowance in one go
If you would like to invest your £20,000 allowance for the current tax year into an Investment ISA but haven’t yet chosen where to invest, you can hold cash in your account until you’ve made up your mind.
Gradually investing your allowance may be useful if, for example, you want to make investment decisions at a later stage, or perhaps you’re uncertain of market conditions, and would like to bide your time. Whatever your reasons, you don’t have to invest your ISA allowance in one go.
Don’t exceed your pension allowances
If you’re planning on topping up your pension, make sure you consider the Lifetime Allowance, which is the maximum total amount you can hold within all your pension savings without having to pay extra tax when you withdraw money from them. It is currently £1.055m, up from £1.03m in the previous tax year.
As mentioned earlier, there’s also the pension annual allowance, which is the amount that can be paid into a personal pension and which you can receive tax relief on each year. If you exceed your annual allowance, you’ll normally face a tax charge. This amounts to tax at your marginal rate for any amount paid into your pension that is greater than the annual allowance.
Anyone who has drawn more than their tax-free lump sum from their pension will have the amount that they can contribute to a pension reduced to £4,000 or 100% of earnings, whichever is lower, as their annual allowance is replaced by the Money Purchase Annual Allowance (MPAA).