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.
5. Pay attention to your capital gains tax allowance. Same for your Dividend allowance
Capital gains tax-free allowance: £12,000, including up to £2,000 dividend allowance
This tax year, you have a personal £12,000 tax-free allowance (also called the Annual Exempt Amount). This means the first twelve grand of profit you make in the tax year will not be taxed.
So what counts as profit? Notably, when you sell (or ‘dispose of’) an asset and make a profit from the sale, you have to pay taxes on the gain (only on the difference between what you bought it for and what it sold for). This can be from a property sale, from selling valuable items, or selling stocks and shares, and so on (more details here).
Dividend income also counts as profit. If you own shares in a company, you may be receiving annual dividend payments. However, the dividend allowance this year is up to £2,000, so you will have to pay taxes on dividend income above that amount even if you still have a personal allowance remaining.
Tip: You can reduce your annual profits by deducting any losses.
Another tip: We know that tracking and organising your income, outgoings, savings, dividends and more can be tedious and complicated. Not to worry. Money Dashboard can help do this quickly, for free. Simply link up your accounts and you will see the income you receive, making the tax-admin easier.
6. Save early for your children (Junior ISA annual limit)
Maximum contribution: £4,368
If you have a child in the UK under 18 you can open a Junior ISA to kick start their savings. Anyone can contribute funds to their account. The annual maximum in the 2019-2020 tax year is £4,368. (This limit will jump to £9,000 in the 2020-2021 tax year.)
Just like your ISAs, the benefits come down the road. Your child won’t have to pay any tax on future earnings from this account.
When the child turns 16, the account can be transferred to their name, although they can’t withdraw the funds until 18.
7. Make use of the marriage allowance
Maximum tax savings: up to £250
The perks of marriage extend to taxes, too – with some strings attached. The marriage allowance lets you transfer £1,250 of your personal allowance to your husband/wife/civil partner. This reduces the receiver’s tax by up to £250 that tax year.
This only really applies if one person is a low earner, with an income below £12,500. The UK Marriage Allowance calculator can help you determine how much you would save by applying.