There is now under 1 month left of the current tax year, which also means that we are closing in on the end of various tax allowances. In this guide, I cover various tax allowances that individuals, investors and business owners should consider taking advantage of before April 5th, when it can possibly disappear forever. If you need regulated tax advise please speak to your accountant and/or tax advisor or contact us at firstname.lastname@example.org ,
Dividends can be a great way to generate that passive income that we all like through investing in paper assets that pay dividends. Additionally if you own shares in your own business, dividends provide a way to pull out cash generated from the business. Similar to most things that provide you an income you tend have to pay tax, however there is a £2,000 allowance meaning you can earn or pull out £2000 in dividends without having to pay any tax. However, if you have a relatively big investment portfolio that generates more than this, then you most definitely want to use up other allowances such as an investment ISA or pension, which we will get into in a moment. If you are yet to pull out cash from your investment portfolio or business, you may want to do this before the new tax year.
Any dividends taken out above the allowance (including your personal allowance) will incur Basic-rate taxpayers pay 7.5% on dividends, Higher-rate taxpayers pay 32.5% on dividends, and Additional-rate taxpayers pay 38.1% on dividends.
Capital Gains Tax (CGT)
If you have any investments (outside of tax wrapper accounts like ISA & Pensions) for which you have main pretty substantial gains on you may want to sell those assets now and take advantage of the allowance. The CGT allowance for this tax year is £12,000
An ISA, which stands for individual savings account, it is an investment account for which any gains within this account is tax-free. You can deposit up to a maximum of £20,000 per before April 6th. They are various types of ISA’s and so the £20k limit can be spread across these. The types of ISA’s are as followed cash ISA (including a Help to Buy ISA), Stocks & shares ISA, Lifetime ISA (LISA), an innovative finance ISA (IFISA).
Lifetime ISA (LISA)
If you are between the ages of 18 to 39, you can save & invest up to £4,000 in a LISA and actually continue to do this each tax year until you are aged 50. As you do this, the government will top you up with a 25% bonus every tax year but this money can be used to either buy your first home and/or to be used as an alternative to a pension. At the age 60, you can take everything out tax-free.
Your children also have an allowance that if not used up just disappears, in 2019/20; you can deposit a maximum of £4,368, which if not used, disappears. Your child just needs to be under 18 and of course a UK resident. There are two type of Junior ISAs, which are the cash ISA, and junior stocks & shares ISA, both allows you to save for your child with tax-free gains. You can either put all of the allowance into cash, in investments or a mixture of both. At the age of 16 the child can take ownership of the ISA and at age 18 they can start withdrawing.
Any unused allowance cannot be pushed forward. Your child will get a new allowance the next tax year, and any savings or investments that stay within the ISA wrapper will continue to earn returns and reap the tax benefits until you one day decide to withdraw the funds.
This is essentially a pension for your child, and probably one of the best ways to guarantee generational wealth. As with the junior ISA you can deposit and invest for your child but the funds within a Junior SIPP can only be access at age 55 (57 from 2028) . You can Invest up to £3,600 per child, per tax year and receive the 20% bonus.
We believe that pensions are the most tax efficient way of investing for the future, so long as you are happy to wait until you are 55 (57 if not 55 by 2028) to start drawing from your pension. The annual allowance is a limit to the total amount that can be contributed to a pension pot for tax relief purposes. The allowance for this tax year is £40,000 (a lower limit of £4,000 may apply if you have already started accessing your pension). If you have multiple pension pots, this allowance applies to all of them and not on a ‘per scheme’ basis. If you do exceed the annual allowance then you will not receive tax relief on the contributions you above the limit and you will receive annual allowance charge, which will, added to the rest of your taxable income. You may be able to bring forward any unused annual allowances from the previous three tax years, to either reduce your annual allowance charge to a lower amount or reduce the annual allowance charge completely. For people already who have already started drawing a flexible income from a pension, your annual allowance is £4,000.
Inheritance tax allowances
Ok, this one is for your rich people that want to pass on valuable things to your children. You will be charged inheritance tax if you give away more than £325k in the last 7 years before your death however, you can receive (or give) Gifts of up to £3,000 in a tax year exempt from Inheritance Tax. You can carry unused exemptions forward to the next year If you didn’t make a gift in 2017/2018, you can make IHT-free gifts of up to £6,000 before the new tax year.
Enterprise investment schemes (EIS)
Enterprise investment schemes (EIS) give tax relief up to 30% for investments up £1m in new shares in relatively small qualifying trading companies that are not listed on any stock exchange.
Seed enterprise investment schemes (SEIS)
Through investing in seed enterprise investment scheme (SEIS), you can get 50% income tax relief on investments of up to £100,000 each year.
Venture capital trusts (VCT)
VCTs are a type of investment trust that invest in small companies and the good thing about investing in this type of higher risk but diversified portfolio is that you can receive income tax relief of 30% for up to £200,000 for shares. The gains are exempt from capital gains tax.
Borrowing from Future earnings
If you believe that in the next years you earnings rate, savings rate and investment rates will all increase then you may want to consider borrowing from future earnings so that you still benefit from this year’s allowances. Take John who has a net worth of £30,000 and has allocated his money this year to be split across an emergency fund and other non-binding expenses totalling £24,000. This means that John is now left with £6,000 left to invest in his stocks & shares ISA, meaning he will miss out on £16,000 of the allowance. If John is certain that he will receive an extra £16,000 in the next tax year above his standard budget for the year, then he can still top up his portfolio with £16,000 and use the future inflow to cover the future expenses.
Delaying for future allowances
If you are in a position with much cash ready to invest today, depending on whether you have used up as many allowances as you can, you may want to consider waiting until April 6th before redeploying that cash. Alternatively, if you see an amazing investment opportunity today, you may still get into it using a general investment account, and from April 6th onwards, transfer the position into an ISA for example.
Keep your eyes peeled for new tax year allowances and how we can take advantage of them.If you have any questions please email us at contact@JAXFinancial.co.uk
Can you think of any other allowances that we should take advantage of before the new tax year?