The financial year end of 5th April is approaching fast. Rob Wood, Independent Financial Adviser, looks at some of the personal finance areas you should be checking:
The maximum pension contribution on which tax relief can be claimed in any one year is £40,000, but you are withdrawing funds under a flexible drawdown arrangement, then the limit reduces to £4,000. This is intended to stop people recycling funds by claiming tax relief twice on the same contribution. In order to qualify for tax relief, the maximum personal contribution must not exceed 100% of your pensionable earnings, though employer contributions would permit this limit to be exceeded.
The tapered annual allowance limits the amount a higher earner can put into a pension. The tapering effect reduces an individual’s annual allowance from £40,000 down to £10,000, but the allowance is only reduced at a rate of £1 for every £2 over the income limits. If you earn over £150,000 gross per annum, there is a good chance you will fall into this category and advice should be sought.
Provided that the annual allowance for pension contributions has been used in full in any one year, you can carry forward any unused allowance from up to three previous years. The oldest unused relief must be carried forward first, and no allowance can be carried forward from years in which the scheme member was not a member of a registered pension scheme.
Pension lifetime allowance
The maximum sum which can be saved in a pension scheme over the course of a lifetime without incurring tax charges is currently £1,030,000 for the tax year 2018-19. This sum covers all the pensions you may have, including the value of any pensions due from any defined benefit schemes, but it does not include your state pension. However, in the same way as with previous reductions in the lifetime allowance, it is possible within strictly defined limits to preserve larger sums by applying to HM Revenue & Customs for ‘protection’ before the tax year end on 5 April.
Individual Savings Account (ISA) allowance
The maximum amount which can be contributed to an ISA in 2018/19 is £20,000 (and will be the same in 2019/20). Both spouses are entitled to their own allowance, but unlike the situation with pensions, an unused ISA allowance cannot be carried forward. So it really is a case of ‘use it or lose it’!
Capital Gains Tax
It is worth checking to ensure that the £11,700 exemption from Capital Gains Tax is used each year by both members of a married couple to shield gains on investments which are not held within a tax-protected ‘wrapper’ such as an ISA.
The personal tax allowance is currently £11,850 p.a., increasing to £12,500 p.a. from 6 April 2019. When a taxpayer’s income exceeds £100,000 p.a., the personal allowance starts to be reduced, and it ceases to be available when income reaches £122,000. The effect is that income between these two levels is taxed at up to 60%.
Gifts can be made each tax year which will reduce the value of an estate for the purposes of Inheritance Tax. The annual exemption is £3,000, and if this is not fully used in one year the balance can be carried forward to the next. In addition, gifts up to £5,000 can be made by parents on the marriage of children, and £2,500 by grandparents. Furthermore, any number of gifts of £250 can be made without attracting tax.
The most valuable exemption applies to outright gifts of unlimited value which are made to individuals (and not trusts) more than seven years before the death of the donor. Thereafter, these ‘potentially exempt transfers’ become wholly exempt from Inheritance Tax.