As the new financial year approaches, it’s a good time to read up on the wide range of tax reliefs offered by the government when it comes to putting money aside.
Most tax-free allowances apply only in a single financial year, and the current lot will expire on 5 April – so if you are going to act, you’ll need to do so soon. Here’s what is on offer and how you stand to gain.
Saving and investing through an ISA
You can put up to £15,240 into a cash or investment ISA in this tax year (the allowance will be the same in 2016-17), and this shelters your holdings from income tax and capital-gains tax.
If you are planning to put money into a savings account then it absolutely makes sense to use an ISA – provided that the returns you get are as good as on non-ISA accounts. With interest rates so low at the moment, the tax benefits of cash ISAs are fairly negligible, but this could change in the future – and your money will remain protected from tax.
If you are investing for the longer-term in stocks and shares, an ISA is worth considering and is likely to be a better idea than putting money into shares or funds outside an ISA. But it is also worth considering using a pension (see below), even though your money will be locked away until age 55.
The Junior ISA works in a similar way, but the annual limit is £4,080 for savings or investments on behalf of a child. The money can’t be accessed until the child turns 18, however.
And of course in the next tax year, you will also have the option of an Innovative Finance ISA, so you can get tax-free returns on your peer-to-peer lending up to the annual ISA limit.
For every £80 you put into a pension, the government adds £20 in basic-rate tax relief. Higher- and top-rate taxpayers can get a further £20 or £25 respectively back through the self-assessment system.
There is an annual limit of £40,000 on contributions, though, but this can be carried forward.
Recent speculation that pension tax relief could be limited in the imminent Budget meant many people have decided to increase their pension savings over the last few weeks. But it now looks like any changes have been postponed until a later date.
Some firms allow employees to participate in a scheme called salary sacrifice, which means pension contributions are taken out of salary before tax and national insurance is calculated. This can have other advantages, such as retaining entitlement to child benefit, but it is probably too late now to join a scheme for the current tax year.
There is also an annual capital-gains tax allowance, which means you can sell successful investments with no tax to pay provided your profits are below a certain level – £11,100 at present. CGT is charged at 18% for basic-rate taxpayers and 28% for higher earners.
This allowance can’t be carried over until next year, so if you have investments to sell outside of a pension or ISA, it might be worth disposing of at least part of them by 5 April.
If you have a considerable sum to invest and don’t mind taking some extra risk, you could consider Venture Capital Trusts or Enterprise Investment Schemes: both put money into small businesses with potentially high growth rates, and they offer significant tax relief provided shares are held at least for the medium term.
There is a considerable risk of losing money on such schemes, however, and they should be approached with caution.