In the midst of the Covid-19 lockdown it’s easy to forget the 2019-2020 tax year is ending. But 5 April is just around the corner, and with it the deadline for maximising your tax allowance.
Maximise tax benefits before the deadline
Dedicate some time to make sure you know what to do at the end of the tax year. This list can be used every year as a reminder.
1. Your ISA allowance: Use it if you can
Maximum contribution: £20,000
For the 2019-2020 tax year the Individual Savings Account (ISA) allowance is £20,000.
The tax benefit is for ‘future you’. You will pay no income tax on the interest or dividends received from the money in your ISA. And profits from investments are free of Capital Gains Tax.
If you already have an ISA, check how much you have contributed this year and, if you can, consider making an additional lump payment. If you don’t have an ISA, it can be quick to set one up and make a deposit.
If your payments exceed the £20,000 maximum (between 6 April 2019 and 5 April 2020), the additional funds will not be entitled to tax relief.
2. Consider topping up your pension
Maximum tax-deductible contribution: up to £40,000
Your workplace or personal pension contributions are tax-free up to a point. This means any money you put into your pension will be deducted from your end of year tax bill. Again, up to a point – use a pension tax relief calculator to help determine your personal limits.
As a guide, according to the UK government:
- You only pay tax on contributions that exceed £40,000 (this year’s total pension tax allowance)
- Your allowance may be lower if your income exceeds £110,000
- You get tax relief on private pension contributions worth up to 100% of your annual income (if this is equal or less than £40,000)
Don’t forget to claim tax relief in your Self Assessment tax return, especially if your pension scheme is not set up for automatic tax relief. Your relief can come in the form of a tax rebate, a change to the tax code, or a reduction in tax already owed to HMRC.
Worth noting: your pension’s lifetime allowance is £1,055,000.
3. Limit inheritance tax
Maximum tax-free savings: £3,000
For the 2019-2020 tax year, the threshold at which no Inheritance Tax is paid is £325,000. The standard Inheritance Tax rate is 40%, only charged on the value of a deceased’s estate above the threshold.
If you don’t want your inheritor to worry about the payments, or you as a future inheritor are worried about a big tax bill, you can start planning ahead.
You can give away (or receive) assets or cash up to £3,000 in a tax year without it counting towards the value of the estate.
For more long term planning, remember that you can give or receive greater value gifts each year, but these are only exempt from inheritance tax if the giver is still alive seven years after making the gift.
4. Give to charities
Maximum tax relief: not to exceed your taxes owed that year
Giving is not only good for the soul. It can lead to a tax bonus.
For every £1 you donate from your pocket as Gift Aid you can also claim a portion back for tax relief.
Better yet, when making a Gift Aid declaration to HMRC, you can include all donations from the last 4 years – so long as it doesn’t exceed total tax paid that tax year.
And if you’re paying taxes at 40%(or higher), for every £1 you donate as Gift Aid, you can claim back 20% of the donated amount in tax relief. If you pay a 45% tax rate, the amount you can claim rises.