Make sure you maximise your tax allowances
With the current tax year ending on the 5 April, now is the perfect time to review your finances to ensure you make the most of valuable allowances. It is also important to understand what opportunities the new tax year offers.
Below we offer helpful tips about what to consider before the current tax year ends and the new one starts.
1. Make the most of your allowances
You have a series of annual allowances, many of which are reset on 6 April.
- You can invest £20,000 into your ISA each tax year. The Lifetime ISA, is available to those under 40 years old and are saving for their first property. It has its own annual limit of £4,000 which, if used, makes up part of your overall £20,000 allowance.
- In the current tax year, most people can receive income of up to £11,500 before they pay tax. If your income is below this figure, you can transfer up to £1,150 of this tax-free allowance to your spouse or civil partner, provided they have an income below £45,000 (or £43,000 in Scotland). This will mean they save up to £230 in tax (£1,150 x 20%). The marriage allowance was first introduced in April 2015 and claims can be backdated to this date. If you were eligible to claim in 2015/16 it was worth £212, and in 2016/17 it was worth £220. By backdating, you may be able to reclaim up to £662.
- It was also announced in the Autumn Budget that there would be a slight change to the Marriage Allowance. Previously, if a person’s spouse died before a claim was made, their surviving partner would not have been eligible for the funds. This was changed in November 2017 so that the surviving partner can claim back the unused allowance. This can be backdated by up to four years.
- Capital Gains Tax (CGT) can be due when you sell or give away an asset that’s increased in value. Everyone has a CGT allowance of £11,300, called the Annual Exempt Amount. As CGT is not paid on gifts between spouses and civil partners, you may want to restructure your investment portfolio to ensure you are making the most of your allowances.
- You are currently able to receive dividends of up to £5,000 tax free from shares, however this will change to £2,000 from 6 April 2018. For both investors and company owners who pay themselves dividends, it’s worth reviewing how it may affect future plans.
2. Inheritance Tax planning
- The annual gifting allowance of £3,000 allows you to give away assets or cash up to this amount free of Inheritance Tax (IHT), and you can carry over any leftover allowance from the previous year allowing you to give away £6,000 tax free. This means a couple could give away up to £12,000 free from IHT.
- In April 2017, a new residence nil-rate band was introduced for those leaving a qualifying residence to a direct descendant which includes children and grandchildren. It will increase to £125,000 per person in the new tax year and will continue to rise each year before reaching £175,000 in 2020/21, meaning some married couples and civil partners could leave up to £1 million to their family IHT-free.
3. What should be considered in the new tax year?
- The Pension Lifetime Allowance will increase by £30,000 from the current £1m limit, to help keep pace with inflation.
- The Income Tax Personal Allowance in England, Wales and Northern Ireland will increase to £11,850 - an additional £350 per year before being subject to Income Tax. The higher rate threshold will increase to £46,350 (from £45,000) it means taxpayers can earn more before being subject to the 40% rate. (N.B. tax bands are different in Scotland).
- The CGT annual exempt amount will increase from £11,300 to £11,700 from 6 April – a welcome boost for investors and second property owners.