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Six items for your end of tax year checklist

06 April 2020

3 minute read

There are several ways you can make the most of annual allowances before the end of the tax year, and also some things you may want to avoid doing.

Remember, the value of investments can fall as well as rise and you could get back less than you invest. Seek independent advice if you’re unsure of this investment’s suitability for you.

What you’ll learn:

  • How you can protect your savings from tax.
  • Why it’s important to consider your capital gains tax allowance.
  • Why pension allowances matter.

Here’s a handy checklist outlining how to make the most of your available allowances before 5 April.

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.

Item 1: Consider your ISA allowance

One of the most tax-efficient ways to invest is through an individual savings account (ISA). This can hold a wide range of investments, including cash, funds, shares, gilts and bonds.

You have an ISA allowance of £20,000 in the 2020-21 tax year, which can be split between cash, investment, innovative finance or lifetime ISAs.1

There’s no income tax, tax on dividends or capital gains tax (CGT) to pay on any gains from investments held in an ISA.

It’s worth noting, however, if you invest outside an ISA you won’t necessarily have to pay any tax, as long 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.

Find out more about your tax allowances

Investment ISA

An easy way to start investing

Also known as a stocks and shares ISA, an Investment ISA is a tax-efficient2, simple way to invest for your future. Invest up to £20,000 per year and the returns you make from your investments are tax-free.

Item 2: Decide if 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. 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 £200,000 and your income and pension contributions made on your behalf exceed £240,000.3

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 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 these pension tax rules can change in future and their effects will vary depending on your personal circumstances.

Item 3: Remember your CGT allowance

In the 2020-21 tax year you have an annual CGT allowance of £12,300. This means you can sell shares and investments, property and other assets without having to pay any tax on the first £12,300 worth of gains.4

For example, if you plan on selling shares that you will make £15,000 worth of gains from, you could make use of your CGT allowance by selling them in two batches, during this tax year and the next one.

Bear in mind you do not pay CGT on assets held in a pension, ISAs, or your main home.

Item 4: Don’t open two of the same types of ISA in one tax year

ISA rules mean you can split your allowance across a combination of different types of ISA.

However, you cannot open two of the same type of ISA, so you couldn’t pay into two cash ISAs within the same tax year, for example.

Item 5: Don’t assume you have to invest your ISA allowance in one go

If you want to invest your £20,000 allowance for the current tax year into an Investment ISA but haven’t decided where to invest, you can hold cash in your account.

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.

Item 6: Don’t exceed your pension allowances

If you plan on topping up your pension, make sure you consider the Lifetime Allowance. This 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 £1,073,100, up from £1,055,000 in the previous tax year.

There’s also the pension annual allowance. This 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 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).

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

Investment ISA

An easy way to start investing

Also known as a stocks and shares ISA, an Investment ISA is a tax-efficient2, simple way to invest for your future. Invest up to £20,000 per year and the returns you make from your investments are tax-free.

Your first steps

Once you’re confident your finances are in order, you need to start planning your investments. Get started by setting financial goals. Are you investing for growth? Or income? We'll help you answer these questions and more in this section.

Reviewing your investment portfolio

Successful investing isn't just a question of allocating your savings to various assets and then sitting back to wait for the profits to roll in. If only it were that simple.