With the end of the tax year fast approaching, there are some steps you can take to make the most of it. Most of us set our financial goals and plans within a calendar year. However, arranging some of our finances to line up with the tax year can really help give them a boost.
Here’s how you can take advantage of this yearly event.
When is the end of the tax year?
Every year, it’s surprising how it creeps up, so it’s better to be prepared in advance. Organising your taxes can be super boring, but it’s also super important!
In the UK, the tax year runs from 6 April to the following 5 April.
This means that the current tax year will end on 5 April 2021. There’s no need for alarm bells just yet. You still have a little bit of time to get things sorted.
Why is the end of the tax year important?
There are a few different ways that this date affects our finances. It’s really great to try and have yearly financial goals, but this date is important to note.
Melloney Underhill, Marketing Insights Manager at St. James’s Place Wealth Management explains:
“Acting before the end of the 2020/21 tax year on 5 April and making the most of all the allowances and reliefs available to you could go a long way to helping you reach your goals sooner.
Tax-efficient wrappers such as ISAs and pensions are ideal ways to begin your investment journey. You can put your money into a wide range of investments, which reduces your risk and broadens the opportunities for longer-term growth. The longer your money is invested, the greater the potential rewards. But what’s really valuable is the potential for extra returns provided by the tax advantages of these wrappers. Unlike assets held outside of these wrappers, you don’t pay Capital Gains Tax (CGT) on the growth, and that can make a huge difference over time.”
What does the end of the tax year affect?
As Melloney mentioned, the two main personal investment accounts affected are:
- Pensions
- Stocks and shares ISAs
Because these accounts are both tax-efficient ways to invest, the clock they run by is the tax year.
Some other key things to think about before April include:
- Annual gifting allowance
- Junior ISAs (if you have children)
- Capital Gains Tax (CGT) allowance
Why is it important to maximise allowances?
Although accounts like pensions and ISAs are tax friendly, they have limits on contributions.
At the end of the tax year, certain allowances and reliefs will expire. They will start again with the beginning of the new tax year, but often any unused amount doesn’t roll over.
It’s really important to try and maximise any allowances if you’re able too. Because in the long run, this extra money invested in a wrapper account shielded from tax has a better success of growing.
Also, the allowances may change in future years. So it’s important to try and make the most of them now while you can.
What are the current allowances?
While the personal allowances for these different areas may change, let’s take a look at the current limits:
Stocks and shares ISA
If you’re over 18, you can pay a total of up to £20,000 into this type of account before the end of the tax year.
Private pension
The annual amount most can save into pension pots is £40,000 per tax year. Pensions are slightly more complicated, and sometimes you can carry over some allowance from the previous three tax years. Also, people on high incomes (over £200,000) may have a reduced annual allowance.
Gifting allowance
You can gift up to £3,000 per tax year, which can help reduce your Inheritance Tax (IHT) liability.
Junior ISA
Up to £9,000 can go into one of these accounts for someone under 18, and it has many of the same benefits as a regular ISA.
Capital Gains Tax (CGT) allowance
The first £12,300 of capital gains per year are tax free. Then, anything over that has a tax rate depending on your income tax bracket.
What is the benefit of doing this before the end of the tax year?
Things are quite unpredictable right now due to the coronavirus pandemic and your circumstances may change later in the year.
By making the most of this tax year and starting the next one with a clean slate, you’re setting yourself up well for the rest of the year.
Being able to make the most of your allowance each year will really benefit you in the long run. Otherwise, you’ll be wasting this years’ allowances and eating into next year’s unnecessarily.
Check out some of our top-rated stocks and shares ISAs to make sure you’re using an investment account that suits your goals when maximising your allowance.
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The post What more can I do ahead of the end of the tax year? appeared first on The Motley Fool UK.
