End of year tax allowance - use it or lose it!Posted on: 08 March 2013 by Chris Rowe
Chris Rowe considers end of year tax allowances such as Capital Gains Tax as well as the value of ISAs and Junior ISAs
With Christmas now just a distant memory, what do we have to look forward to in the coming months until the Easter rabbit calls? But if you've already had too much of crème eggs and chocolate bunnies, how about looking forward to making use of your unused tax allowances.
'Looking forward to' and 'tax' are phrases very rarely found in the same sentence. But we have good reason to in this case. Tax allowances are akin to gifts from the government, which all too often get forgotten about, until it's too late. In effect millions of pounds could be lost to the tax man in unused ISA allowances alone. In times of austerity, that's a costly mistake.
So we thought we'd take a look at three tax allowances you can very easily benefit from.
Individual savings accounts (ISAs)
ISAs now come in three varieties – the main two being Cash ISAs and Stocks and Shares ISAs. Your ISA tax allowance for this year is £11,280 meaning you can pay in up to £11,280 this side of April 5th as long as you meet a few requirements.
If you're a UK resident, aged 16 or over, you can pay in £5,340 to the cash variety of ISA in the current tax year (the tax year runs from April to April). Any money held within your cash ISA accumulates interest without any tax being charged, unlike bank accounts.(1)
If you're a UK resident aged 18 or over, you can also invest in a Stocks and Shares ISA. You can pay in another £5,340 to a Stocks and Shares ISA, or if you haven't used your cash ISA allowance you can pay in the full amount of £11,280.(1) Just like the cash version, any gains or income from your Stocks and Shares ISA won't face any tax charges – either income tax or capital gains tax.
In addition to this allowance, a third option may be a Junior ISA. You can invest the Junior ISA limit of £3,600 in stocks and shares, cash or a combination of both.(1)
Junior ISAs must be set up by parents or guardians and held in a child’s name. Any money is then locked away until the child reaches 18.
A child can have a Junior ISA if they are resident in the UK and:
- born on or after 3 January 2011
- born before September 2002 and is under 18
- born between these dates and do not already have a Child Trust Fund
Remember - your ISA allowance is lost at the end of each tax year, so if you don’t use it, you lose it!
Capital gains tax
Next, capital gains tax (CGT) allowances. Up until April 5th 2013, we can make capital gains of up to £10,600 without incurring any tax. After April 5th, a new tax year starts and we all get a new allowance, the amount of which is yet to be confirmed. What you can't do is 'roll over' any unused allowance from the previous year.(2)
In our experience, the CGT allowance seems to be one of the most under-used allowances, but it's still a very useful one. It allows you to realise any gains on any investments that you've held without the benefit of a tax wrapper (like an ISA). For example, the shares you bought years ago that now appear to be worth a nice little amount could be cashed in within your capital gains allowance without you having to pay any tax.
Calculations for CGT can be on the complex side, however, so we always recommend employing the services of an accountant as well as your financial adviser to make sure you don't lose out.
While discussing tax allowances, it is always worth taking a longer term look and thinking ahead towards pension and retirement planning. As an incentive to plan for retirement the government offers 'tax relief' on pension contributions, which, putting it simply, is extra money that the government adds to payments you make into a pension scheme.
Even if you aren't in paid employment, you can still qualify for this relief and are allowed to pay in £2,880 from your own pocket to a pension scheme. Tax relief is added to this amount and turns your contribution into £3,600 immediately. (3)
An independent financial adviser will have access to the best ISA and Pension schemes and will be able to offer a detailed report as to the suitability of such arrangements for you. So just like the tax allowances, an IFA is worth utilising as part of your financial planning strategy.
(1) HMRC Bulletin
(2) HMRC Website – CGT
(3) HMRC Website – Pension Relief
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