Whether you have made New Year’s resolutions or goals for 2020, you should make sure your finances take top priority. The UK tax year ends on 5 April and so January, February and March can provide a last-minute chance to save tax with some careful planning. We have put together our top tips on how to save tax below.
Use your Individual Savings Account (ISA) allowance
The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple invests £40,000 before the end of the tax year on 5 April. There is no Capital Gains Tax (CGT) and no tax on UK income and no need to declare this on your tax return. If you do not make use of your ISA allowance it cannot be carried forward, so you need to use or lose it. If you would like more information on ISAs please see our Guide to ISAs.
Top up your pension pot
The standard annual pension allowance is £40,000 per person in the current tax year. Be aware, this limit covers both yours and your employers’ contributions. This is reduced if your income exceeds limits or you have taken an income from pensions using Flexi-access drawdown. However, if you are a higher-rate or additional rate taxpayer, you can claim the extra tax relief. You can also carry forward any unused annual allowance from the three previous tax years, provided you were a member of a registered pension scheme. Any unused pension allowance for 2016/17 will be lost on 5 April 2020 if unused.
Capital Gains Tax (CGT) allowances
Individuals have an annual CGT allowance that currently enables them to make gains on investments of up to £11,700 free of tax. Any gains in excess of the allowance are charged to CGT at either 10% or 20% (18% or 28% for residential property), depending on the individual’s other total taxable income in the year the gain arises. Married couples may be able to use each other’s annual CGT allowance by transferring assets before they are sold.
Inheritance Tax (IHT)
The ‘residence nil-rate band’ (RNRB) now enables a ‘family home’ to be passed wholly or partially tax-free on death to direct descendants. This extra tax-free amount is being phased in over four years, initially at £100,000 for 2017/18, rising each year to reach £175,000 each in 2020/21. The RNRB is in addition to an individual’s own nil-rate band; currently £325,000 per individual.
Additional rate taxpayers
If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. Therefore, if you earn £123,700 or more, you will not receive a tax-free personal allowance at all. The additional rate income tax (45%) is also charged on earnings of over £150,000. Pension contributions and moving investments to a lower-rate tax-paying spouse could reduce this liability.
The Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT) and the Seed Enterprise Investment Scheme (SEIS) are worth a thought. EIS investments offer an Income Tax credit and CGT deferral.
Utilise your spouse’s personal allowance
If your spouse is a lower or non-taxpayer and you have income-producing assets (for example, buy-to-let property or even saving accounts), you could put these in their name to lower your overall Income Tax liability. Assets can be passed between spouses without any CGT liabilities.Transfer £1,250 of your Personal Allowance to your spouse with the Marriage Allowance.
Keep up to date with the latest tax deadlines here.