As 5 April 2022 is fast approaching, now is the time to plan for how you can make your savings and investments more tax-efficient.
Preparing a few months in advance of the deadline may help you feel less stressed by the end of the tax year, which can be a make-or-break time for you to use your allowances and capitalise on all the available tax efficiencies.
Here are five practical tips to get your finances sorted before the end of the tax year.
1. Maximise your ISA contributions
As you may know, ISAs, or Individual Savings Accounts, are a handy tax wrapper that can be used to grow your wealth without increasing your tax bill. If you want to make an investment before 5 April, it’s wise to make sure you’ve maximised your ISA contributions.
While ISA contributions don’t qualify for tax relief, money in an ISA is protected from Income Tax and Capital Gains Tax, no matter how much profit you gain.
Here are a few ISA options you could explore:
- A Cash ISA, into which you can contribute up to £20,000 every tax year, although experts are predicting that Cash ISAs may not perform well in the wake of rising inflation.
- A Stocks and Shares ISA that allows you to invest up to £20,000 in equities.
- A Lifetime ISA (LISA), designed for buying your first home or retirement. The contribution limit is £4,000, with a 25% government top-up applied to every contribution. The catch here is that to open a LISA you must be over 18 and under 40, so you must make your first payment before you turn 40.
The total amount an individual can contribute to ISAs in the 2021/22 tax year is £20,000. This can be split between several different ISAs, but you must be careful not to exceed this limit.
For example, if you have a Cash ISA that you paid £5,000 to in May 2021 and a LISA that you put £4,000 into, then you can only invest the remaining £11,000 into your Stocks and Shares ISA before 5 April 2022.
If you have children and want to invest on their behalf, a Junior ISA (JISA) for under-18s could be a good place to start. You can pay up to £9,000 into a JISA before 5 April 2022.
If you are saving into a JISA for your child, this is a separate account and you can save a full £9,000 in the 2021/22 tax year.
For more guidance on opening an ISA and investing your wealth, get in touch. We can help you understand all your options and advise you on suitable investments to fit your circumstances and long-term financial goals.
2. Contribute as much as you can towards your pension
Your pension may be a profitable place to invest your wealth as the tax year ends.
In the 2021/22 tax year, the Annual Allowance means you can benefit from tax relief on pension contributions up to £40,000 a year, or 100% of your earnings, whichever is lowest.
Although you can continue to pay into your pension once you hit this limit, you would no longer be able to do so in a tax-efficient way. Any contributions over your Annual Allowance may incur a charge.
If your spouse or partner isn’t working, they are still entitled to basic-rate tax relief and can contribute a maximum of £3,600 gross to their pension in the 2021/22 tax year.
If you have already begun flexibly drawing your pension, this will have triggered the Money Purchase Annual Allowance (MPAA). This will limit the amount of tax relief you will get on your contributions. Once the MPAA is triggered, you’ll only get tax relief on £4,000 of your contributions.
While this doesn’t prevent you from making higher contributions, you may find it more beneficial to invest excess money elsewhere.
No matter how much you are able to put into your pension, your contributions will provide valuable tax relief, and any profits your pension investments yield will not be taxed while funds are invested.
Because you can’t earn tax relief on contributions that exceed your earnings in the same tax year, it may be useful to invest as much of this year’s earnings into your pension as you can.
As well as maximising pension contributions in this tax year, you can also “carry forward” contributions from the three preceding tax years. If you didn’t make any pension contributions, or you didn’t contribute the maximum possible, you can use carry forward to make up the shortfall.
5 April 2022 is the last chance to take advantage of your 2018/19 Annual Allowance.
If you are planning to contribute the maximum amount you can into your pension, make sure to check your proximity to the Lifetime Allowance (LTA) first. As announced in last year’s Budget, the LTA will remain at £1,073,300 until 2026.
If your pension savings are near to this amount, get in touch and we’ll help you understand your options.
3. Use your annual exemption to gift up to £3,000 to family members
If you are planning to leave money to your children or grandchildren when you pass away, it could be wise to begin gifting them smaller amounts of money annually, to avoid paying unnecessary Inheritance Tax (IHT).
You can gift family members up to £3,000 each tax year, split across however many people you wish. This is known as the “annual exemption” and is a tax-free way to begin giving your loved ones their inheritance.
You can only carry this forward one additional tax year, so if you have annual exemption remaining from the 2020/21 tax year, it may be wise to take advantage of this exemption before 5 April.
If you exceed the £3,000 mark, you could pay IHT on the amount above £3,000 if you were to pass away fewer than seven years after the gift was bestowed.
This article explains more about ways to help mitigate IHT liability. Alternatively, get in touch and speak with one of our financial planners before the end of the tax year.
4. Use your Capital Gains Tax (CGT) allowance
Your Capital Gains Tax (CGT) allowance of £12,300 for the 2021/22 tax year could help you pay less tax on profits you’ve gained from selling your assets.
CGT is applied to profits gained on assets that have increased in value since you bought them. It also applies to assets you give away or allocate to another person.
Assets that are liable to CGT include:
- Properties that are not your main residence, unless you rented this residence out or used it for business
- Belongings valued over £6,000 (excluding your car), such as art or jewellery
- Business-related assets
- Most shares (not within an ISA), investments within a General Investment Account (GIA) and some bonds
The CGT allowance is referred to as a “use it or lose it” allowance, meaning you cannot carry it over to the next tax year. If you want to make the most of your allowance before 5 April, now is the time to act.
5. Consult a professional
When it comes to making your wealth as tax-efficient as possible, you may find it useful to consult a professional. An expert financial planner can help you make a strategy to reduce your tax liability and grow your wealth.
Get in touch and talk to one of our financial planners. They will discuss your short- and long-term financial goals and ensure that you’re making the right moves to protect and grow your wealth. Part of the process will always involve ensuring that your financial plan optimises all the tax allowances available to you each year.
Get in touch
There’s a lot to take into consideration when you’re trying to maximise your tax planning strategy. If you’re feeling the pressure and time is against you, we can help.
If you have questions about the end of the tax year or want guidance on how to capitalise on your allowances before 5 April, get in touch with us today.
Email enquiries@bowmorefp.com or call us on 01275 462 469.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
