The run-up to the end of the tax year provides ‘use it or lose it’ opportunities to help secure your financial future and pay less tax on the inheritance you leave to loved ones.
Over a decade since the financial crisis, the world is still a very uncertain place. Despite this, investors have enjoyed the benefits of a strong run by stock markets around the world, coupled with record-low volatility.1
However, it would be wrong to believe that market shocks are a thing of the past. From uncertainty over Brexit to the threat from North Korea, there are many risks that pose a challenge to investors now; and any number of unforeseen factors in the years to come.
But these are beyond our control; they cannot be allowed to prevent us from planning our financial futures. Indeed, we will give ourselves the best chance of achieving our financial goals if we focus on what we can control: how and where we invest our money, how much tax we pay, the size of our retirement fund, and how much of our estate passes to our family free of Inheritance Tax (IHT).
Effective financial planning should be a year-round activity. Nevertheless, the months of January, February and March provide us with an ideal opportunity to use reliefs and allowances that would otherwise be lost. These valuable tax breaks can help to create long-term financial security for ourselves and our family.
Make the most of the increased allowance
ISAs have become one of the most popular ways to save, principally because they are simple and readily accessible.
The substantial increase in the ISA allowance to £20,000 for this tax year was a very welcome step in encouraging individuals to invest for their future. However, as interest rates in the UK remain near record lows, money being held in Cash ISAs is failing to achieve the very basic objective of keeping pace with inflation. The result is real losses for savers.
Those who are investing their ISA allowance for the long term – in assets offering the scope for attractive levels of income and capital growth – are giving themselves a better chance of maximising the tax-saving opportunities on offer.
As the end of the tax year approaches, individuals yet to use their ISA allowance, or with accumulated ISA savings, need to carefully consider their options to ensure that they are maximising this valuable opportunity to generate tax-efficient capital and income for the future.
Maximise your annual allowance
Saving into a pension is even more attractive than it was a few years ago. This is because the money can be taken in a variety of ways and it can be more easily left as part of a tax-free inheritance. However, the advantages extend beyond drawing money and passing it on to loved ones; the government still rewards savers by providing them with tax relief on their pension contributions.
For every 80p you contribute to a pension, the government automatically adds 20p in tax relief. Higher earners can claim extra tax relief through their annual tax return, meaning that a £1 pension contribution can effectively cost just 60p.
While tax relief is seen as a means to encourage pension saving, the annual cost to the Exchequer of providing it has now passed £50 billion2. With the government under increasing pressure to reduce public spending, there’s no guarantee that the higher rates of tax relief will be maintained into the future.
Those wishing for a better chance of making their retirement plans a reality should consider fully utilising their annual allowance for this tax year to make the most of the tax breaks on offer. Unused allowances can be carried forward, but only from the three previous tax years.This year is the final chance for pension savers to use the allowance that was in place in 2014/15. If it is not used by 5 April 2018, it will be lost forever.
Don’t waste your gifting opportunities
There are few more confusing – or unpopular – taxes than Inheritance Tax (IHT). But continued confusion and inertia means that HM Treasury can expect to see a 25% increase in IHT revenues over the next five years.3
However, there are a number of exemptions that allow individuals to reduce future bills. Perhaps the best known is the annual gifting allowance. This gives individuals the opportunity to remove £3,000 of assets from their estate immediately (£6,000 if they use the previous year’s unused allowance as well).
Taking steps to reduce your taxable estate by topping up a child’s pension or Junior ISA could go a long way to providing them with an invaluable head start in life. Nevertheless, with the end of the 2017/18 tax year looming, you only have a short amount of time to make this year’s £3,000 gifting allowance count – and to carry forward last year’s, if you haven’t used it already.
It’s a time of the year when individuals and couples are given an opportunity to put their long-term plans back on track by using reliefs and allowances that would be otherwise lost.
Nevertheless, legitimately protecting wealth from HMRC requires some knowledge and expertise to do it effectively. That’s why you should speak with a financial adviser to better understand how you can get maximum advantage for this year and the years to come.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1 CBOE Volatility Index (^VIX), accessed 18 January 2018
2 Personal Pensions Statistics, HM Revenue and Customs, September 2017
3 Office for Budget Responsibility, March 2017