With the end of the 2020/21 tax year quickly approaching, we look at a few key areas to address whilst you still have time to act. Chartered Financial Planner Ian Boasman gives us his top tips.
How much can I put into my ISA this year?
The ISA allowance for 2020/21 is £20,000 and this looks likely to remain the case for the next tax year. You can either invest this into a Stocks and Shares ISA, a Cash ISA or a mixture of the two. Remember, you can only open one of each in the tax year. If you have an ISA already set up from a previous tax year then you can contribute to this, but if you do, you cannot then set up another one elsewhere.
Any unused allowance from the previous tax year is lost if not used, and it cannot be carried forward.
If you are unsure as to where to invest a Stocks and Shares ISA but have left it late and need to make a quick decision before the allowance is lost forever, you can always set up a Cash ISA first with your bank or building society quite easily online.
This will ensure the allowance is used but can then be transferred to a Stocks and Shares ISA at a later date. Transferring ISAs from Cash to Stocks and Shares is a straightforward process (although regulated advice is recommended to research whether this is appropriate for you) and does not use up any of the current years’ allowance. This is because the money being transferred is made up of a previous years’ subscription.
For those wishing to invest efficiently for their children or grandchildren, a Junior ISA allowance is £9,000 per year (2020/21). This is a fantastic way of saving for the younger members of your family and can help them towards future University fees or help towards that first car or house deposit. An individual can access their Junior Stocks and Shares ISA from age 18.
What other allowances should I be looking out for?
We recommend that you keep a close eye on what is being contributed into your pension, either by your employers or you, personally. The starting amount you can put into a pension each year is £40,000, but this also depends on your earnings and whether you have drawn on your pensions previously.
It is important that you seek the assistance of a professional adviser if you are uncertain about how much you can contribute to pensions each year, or whether you think this has been exceeded. You can also carry forward unused allowances from the 3 previous tax years, which is a great benefit and provides flexibility to those who cannot contribute what they want now but may be able to later. Again, care must be taken as it may not be advisable to contribute more than what you have earned for the year, as you will only receive tax relief up to your employed earnings.
When looking at making pension contributions it is important to assess your capacity to tie this money up for the long term. Making pension contributions is extremely tax efficient but also means locking this money away until at least age 55 (or 56 and 57 if you are of a younger generation). You can access pensions earlier if you are in ill health also, but that is not something to you would want to rely on. Therefore, if that money is required before then, perhaps you should consider other forms of saving.
This can become a complicated area of planning and we advise you to always speak to a professional planner. Whilst it is extremely tax efficient, is it actually the right thing to do at your stage of life? Every individual is different in what they are aiming to achieve, and this highlights the importance of understanding those objectives first before contributing as much as possible at the outset. As a financial planning firm, we must first assess whether you need to do this, or whether other areas of planning are more relevant at that time.
Are there any taxes I should account for when it comes to investment planning?
Outside of pensions and ISAs, which are generally seen as the first port of call for long term savings, some individuals are lucky enough to hold Unit Trust accounts (UTs), or General Investment Accounts (GIA) alongside their ISAs. Here we refer to them as GIAs.
These accounts can incur dividend tax throughout the year, as well as Capital Gains Tax (CGT) upon realisation of any gains.
Each individual has an annual dividend allowance of £2,000 (2020/21) before tax is payable. Please ensure that you assess your holdings in these types of accounts, because if your investment is producing an annual dividend greater than this allowance throughout the tax year, it will have to be disclosed on a tax return. A good way to reduce this this tax is to hold a GIA in joint names, which then effectively doubles your dividend allowance, providing this is not being used up elsewhere.
CGT is payable upon disposal of a relevant asset, such as GIA, direct equity/share or rental property to name a few. If that gain breaches the annual allowance of £12,300 (2020/21) CGT becomes payable on the excess.
With this comes planning opportunities - take the GIA for example. By encashing or surrendering units in this type of plan regularly, taking care to stay within the CGT allowance above, you can create a good opportunity to avoid CGT by not allowing un-realised gains to accrue for too long into the future.
This is also useful when you need to utilise your ISA allowances for the tax year. You can disinvest units in your GIA, crystallising gains within your CGT allowance, and then convert these into your ISA. This is commonly known as a ‘Bed & ISA’ and should be carried out every year if you hold both an ISA and GIA alongside one another. Although another topic entirely, this is a big benefit of using a trading platform for your investment portfolio, so that switches and conversions like this can be carried out seamlessly.
Whenever you switch the underlying funds within your GIA this disinvestment will realise capital gains before they are re-invested into the new funds. However, this can be used to your advantage, especially for investments that have seen significant growth over the years.
By regularly reviewing your investment portfolio you can ensure that the annual CGT allowance is used efficiently and avoids any unwanted tax surprises in the future.
Allowances and tax source – www.gov.uk for further information
Please note that past investment performance is not a guide to future performance. Potential for profit is accompanied by the possibility of loss. The value of investment funds and the income from them may go down as well as up and investors may not get back the original amount invested.
Tax is dependent on your own personal situation and circumstances and thresholds are subject to change without notice. The content of this material is provided in good faith and refers to our understanding of current taxation legislation at this time. If you require further information please talk to a Kellands adviser.