Dates to keep in mind
The tax year runs from 6 April to 5 April each year and with tax year end fast approaching, you might be one of the lucky ones – maybe you’ve funded your ISAs, pensions and/or even utilised your capital gains exemptions. In that case, job done, it’s time to sit back and watch everyone else scramble for the 5 April deadline.
The question is, have you missed anything?
It’s a family affair
There may be a child or grandchild’s ISA and pension allowance which hasn’t been utilised in the current tax year – wouldn’t it be great to help a loved one along the way?
Let’s take a closer look…
- Are they making the most of their pensions?
Contributing towards your children’s retirement can start at any age and can result in thousands of pounds in tax relief.
Not only that, but utilising pensions can also reap other benefits including enhanced contribution matching by their employer, restored entitlement to child benefits or tax-free childcare. In fact, with careful planning the use of pensions can result in tax savings, reliefs and benefits far greater than the amount you put in! (See our recent blog – Make the most of tax – really!)
- What about a Lifetime ISA for those under 40?
A Lifetime ISA (LISA) allows younger investors aged between 18 and 40 to save for their first home or retirement. Contributions of up to £4,000 will receive a 25% government top up (up to £1,000 p.a.). They can withdraw the money tax and penalty-free, to buy a first home and/or from age 60, it could make an additional string to their bow regardless of whether they own their first home yet.
- Have your children utilised their ISA allowances?
Your children could benefit from holding a medium or longer-term portfolio in a tax-free environment with the reassurance that they could access it in an emergency.
- What about grandchildren or great grandchildren?
Even small amounts put aside early on can build up a substantial legacy for future generations helping towards future costs of education, buying a home, getting married or even retiring.
There are several different allowances available for grandchildren including Junior ISAs providing tax efficient investments on up to £9,000 per year. Be mindful though as they are accessible at age 18 so be conscious of how much you want them to receive and when.
Alternatively, you can support their longer-term financial security by starting a pension with £2,880 and benefit from a 20% boost from the government.
Opportunities you don’t want to miss
Aside from ISA and pension planning, there are also other allowances which can often get overlooked:
- Apply for Marriage allowance.
This lets you transfer £1,260 of your Personal Allowance to your husband, wife / civil partner. If either you or your spouse/partner have earnings under the personal allowance of £12,570 (tax year 2021/22), you can apply for the marriage allowance which allows you to pass on 10% of your personal allowance to your partner (if they are basic rate taxpayers).
This can save you up to £252 in the current tax year (10% of £12,570 at the basic rate tax of 20%). Once set up, it will recur until you cancel it should circumstances change and you are no longer entitled.
- Fill the gaps in your State Pension.
Under current state pension rules, the maximum benefit is attained once you achieve 35 qualifying years. These can be built up through employment, self-employment, voluntary contributions, and other scenarios such as periods of unemployment or looking after young children. Crucially state pension tends to be the best form of annuity you can benefit from.
The cost to pay for a gap via voluntary contributions is £800.80 (annual equivalent for Class 3 contribution in the tax year 2021/22). Each additional qualifying year works out to be an extra £5.13 a week (or £266.83 a year) in State Pension based on 2021/22 rates therefore it will take approximately 3 years to pay for itself once you receive state pension. (Source: Money Helper)
You can pay for any previous gaps within the last 6 tax years, and this tends to be cheaper than paying for any future years so it’s worthwhile checking before the tax year ends. For the latest guidance visit GOV.UK or further information can be found at Money Helper, the free and impartial website provided by Money & Pensions Service.
- Pay towards your pension even after you stop working.
If you are no longer working many believe their pension provision is set, however, provided you are under 75, you are still able to contribute £2,880 per tax year and receive £720 tax relief from the government. This is immediately outside the estate for IHT purposes as well.
- Use your gifting allowances.
Everyone has an annual gifting allowance of £3,000 which is free from IHT. Please note that any unused allowance for the previous tax year can also be used boosting this to £6,000. You can also give small gifts of up to £250 per person and to as many individuals as you want. In addition, you can give a tax-free gift of £5000/£2,500/£1,000 to a child/grandchild/any other person getting married.
Whilst the tax savings and efficiencies of your own allowances are attractive, considering the wider family can often unlock even more value from your wealth. The results of smaller gifts at regular intervals can be life enhancing for both clients and children in so many ways as discussed by Colin Lawson in his recent article found here – The power of conversation.
- Make a gift to charity.
If you are a basic, higher, or additional rate taxpayer, you can make an unlimited number of gifts to charity. This has no impact on inheritance tax and provides tax relief relative to the amount gifted. If you have surplus capital, this is a great way to reduce the income tax you pay whilst also helping a charity you care about.
This blog is intended as an informative piece and does not constitute advice. If you have any further questions, please don’t hesitate to get in touch with us using the form below or by reaching out to your usual Equilibrium contact.