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If you have got cash sitting there that you want to use it is clearly better to put it into something at the start of the next tax year. In this way you will be making your money work harder than if it was simply sitting in a bank account. But in order to do this you need to work out how much of the cash is available, this includes working out how much is needed for your tax liability. Don’t forget when you fill out your tax return you’re always looking backwards to the previous tax year, so you should have set aside as you go, rather than trying to pay last year’s tax out of this year’s income. If you find you have more money than your tax liabilities you can then put the remainder to work pretty quickly. So now is the time to get your information together for your tax return. The sooner you know what your tax liabilities are the sooner you can make your cash work harder for you. If you have under-provided then at least you can spread the pain by saving extra over the next nine months.
There have been very few real changes to the tax regime in 2019/20 that savers could take advantage of. ISA limits remain unchanged at £20,000, dividend allowances haven’t changed. In fact, almost nothing has changed significantly. Here are some ideas to discuss with your financial adviser.
Pension Tax Relief goes up
The only major change that does come into force in the next tax year are the larger increases in the personal allowance and basic rate band. The threshold for higher rate taxpayers increases from £46,351 to £50,000 at the start of the 2019/20 tax year. While this will clearly give those earning under £50,000 more cash in their pockets, it will also remove higher rate pension tax relief from them, effectively making it more expensive for those earning under the £50,000 threshold to save towards their retirement. To give a clearer example, anyone currently paying higher rate tax on their earnings will benefit from 40 per tax relief on their pension contributions. So someone earning £48,000 currently only has to forego £600 out of their net income in order to put £1000 into their pension. After April 6 the same person will take a little more pay home but it will cost them £800 to save the same £1,000 into their pension because they will only receive 20% basic tax relief.
That said, it is possible to carry forward an unused pension allowance from the three previous tax years. Current rules allow savers to make pension contributions of up to £40,000 a year. In order to make use of the carry forward rules you will need to fill your pension allowance of £40,000 in the current tax year. If then for any reason you have not used the £40,000 allowance from any of the previous three years, you may carry that allowance forward and receive the same tax relief on those contributions that you would have in that given tax year. Theoretically then, if would be possible to carry forward up to £120,000 in pension contributions from the previous three years – assuming you have filled your current tax year’s £40,000 – and receive 40% tax relief on those contributions as they come from a point in time when the higher rate tax threshold was lower but you need to earn enough to make a contribution of that size.
It might seem all too obvious to say it but rather than rush at the end of the year, start putting money into your ISA as soon as the new tax year begins. If you are fortunate enough to have filled your ISA allowance in the previous tax year and still have cash left over at the start of the new tax year, filling it now remembering that this is a tax free savings vehicle, is a sensible course of action. This also applies to Junior ISAs. Making full use of what are very generous tax reliefs for your savings and investments is clearly sensible. Depending on how adventurous you are you may also consider using part of your allowance to invest in an Innovative Finance ISA, which allows investment in Peer 2 Peer Lenders. These are higher risk investments, which are not covered by the Financial Services Compensation Scheme (FSCS) so your risk appetite must be quite high. At the same time however, such investments can offer greater returns.
Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is also a useful allowance on several fronts. But you have to be willing to take a reasonably significant risk in order to make use of it. EIS tax relief offers 30% upfront Income Tax relief on investments in small to medium sized enterprises, as well as exemption from Capital Gains Tax (CGT) should you invest in a company that becomes very successful and provides a significant return on your original investment. People that invest in this way can also defer the CGT liability on other shares they sell until they dispose of their EIS investment. This is also a relief that can be carried back into the previous tax year. So it is possible to invest in an EIS fund in 2019/20 and carry back the tax relief into the 2018/19 tax year.
Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme (SEIS) is similar to the EIS in that it offers tax efficient benefits to investors in return for investment in small and early stage startup businesses in the UK. SEIS was designed to boost economic growth in the UK by promoting new enterprise and entrepreneurship. But as the name implies it is higher risk than some other investments. That said the returns can be high and the tax relief is generous. For starters there is Income Tax relief of 50% on investments up to a maximum of £100,000. SIES also offers 50% CGT relief on up to £50,000 of your investment and potentially CGT relief on the disposal of your shares in the early stage company.
Venture Capital Trusts (VCT) are publicly listed companies that again invest in small businesses The maximum amount that can be invested in a VCT is £200,000 and you will receive 30% Income Tax Relief on your investment so long as you hold the shares for five years. There is also tax relief on dividends and CGT relief on the disposal of shares – after five years – as well. VCTs are an increasingly popular investment vehicle. Last year saw £728m invested through VCTs, the second highest figure on record. Also while the maximum amount savers can invest is £200,000, the minimum they can invest is usually somewhere between £2,000 and £10,000 making them fairly accessible. That said, they are obviously a long term investment. If savers are forced to withdraw their investment early they will lose a portion of the tax relief too.