Tax Allowances, use it or lose it
There are a number of exemptions and allowances that an individual can use in relation to their personal tax position and as we approach the end of the UK’s fiscal year on 5 April, it is important to try and use these, where appropriate, especially as a number of them cannot be rolled forward, so if they are not used then any benefit will be lost.
Perhaps the best-known tax efficient savings format is the Individual Savings Account or ISA. The benefits of putting an investment into an ISA are significant: any interest received from cash, income or capital gains generated from investments held within an ISA are not liable to tax and no declaration is necessary on a tax return. There is however currently a £20,000 limit per year that an individual can add to their ISA and this figure cannot be carried into a new year, i.e. use it or lose it.
For investments that are held outwith an ISA, an individual can take gains of £12,000 each year without incurring a capital gains tax liability. As an example, if you invested £10,000 into the stock market ten years ago and the portfolio has risen now to a value of £22,000, then the entire portfolio could be sold without incurring any capital gains tax.
Under the current Inheritance Tax rules, it is possible for an individual to gift £3,000 per annum without incurring any tax. If a larger gift is made, then it may be subject to tax, unless the individual survives more than seven years. This allowance can be carried forward one year, so if no gifts were made last year then £6,000 could be gifted without troubling the authorities. It can be a particularly useful allowance in order to help children or even grandchildren with expenses. There is also a small gift exemption, up to £250, that allows you to gift to as many people as you wish, provided they have not received any funds from the main gift allowance.
Another allowance that is worthwhile utilising fully is pension contributions. The government will add 25% to any contributions that are made to a pension pot, up to a certain limit. This allowance is slightly more complicated than the others I have mentioned here, and it may be worthwhile speaking to a financial adviser to ensure you are making the most of your pension contributions. The limit to which the government will ‘top-up’ pension contributions is related to your income and capped at £40,000, with the allowance being able to be carried forward for three years, although there are a number of caveats that surround this allowance.
Finally, a very useful way to reduce the amount of tax you pay, whilst also helping worthy causes, is donating to registered charities. Donations that are made with gift-aid can effectively reduce the proportion of an individual’s income liable to tax and can therefore be a very useful tool when trying to reduce an overall tax liability. If you have donated via a website then you should be able to check the amount you have donated over the year and, if you are a higher rate taxpayer, reclaim the higher rate in your tax return. The basic rate should have been applied to the donation at the time it was made.
As you can see there are quite a few different ways to help mitigate your annual tax liability as well helping plan for the future. If you have any questions regarding any of the allowances or would like some additional help ensuring that you are making the most of your affairs, then please do contact myself or one of my colleagues here at Thorntons Investments.
This article appeared in The Scotsman last week (click here to view it online) and also the St Andrews In Focus magazine.
The views expressed are those of Thorntons Investments. The contents of the article are solely for information purposes and are not intended as investment advice. Tax advice is not regulated by the Financial Conduct Authority.