Many people wait until the last few weeks of the tax year to utilise their allowances but there is no reason why you shouldn’t do this at the start of a tax year.
Let’s use ISA as an example. This years allowance is again £20,000 per person. The question is why leave this amount of money in a potentially taxable environment until the last few weeks of the tax year.
We are now a couple of years into the new LISA. LISA stands for Lifetime Individual Savings Account. You are able to contribute up to £4,000 per annum with the Government adding 25% in bonus. That’s up to £1,000 per year from the government.
Too good to be true?
This is only open to those under the age of 40. In addition you are only allowed to take money out as a deposit for your first home or at age 60 without penalty. If you do decide to take money out early you will be hit with the removal of the 25% government bonus. This could be seen as an alternative to pension planning but I would highlight the limited amount of money which can be saved into LISA which in turn could limit benefits in retirement.
Pensions are probably still the most tax privileged savings mechanism we have. Where else can you get tax relief on contributions, virtually tax-free investment returns and take 25% out tax free? For a higher-rate taxpayer this means a £1,000 pension contribution costs a net £600 – a 66% upfront boost – and only 75% of the pension fund is taxed when they take an income, at which point you could be a basic rate taxpayer. That’s before we consider the death benefits which apply to personal pensions, that being in most circumstances prior to age 75, your fund would pass tax free to your named beneficiaries.
Due to changes in life time allowance and annual allowance rules there are restrictions over the amount of tax relief you can have. Therefore it is important that you seek advice before making pension contributions, particularly for those of you within the NHS pension scheme.
These are just a couple of the ideas for using your tax allowances. It is prudent to consider all the other tax implications which include Capital Gains Tax exemptions, inheritance tax planning and gifting of assets. Discussing these with a qualified tax adviser (Dodd Accountants tax team available!) will give you clarity on making the correct decision.
Phil Jackson DipPFS
Independent Financial Adviser
Dodd Wealthcare Limited
Dodd Wealthcare Limited is an appointed representative of Network Direct Limited, which is authorised and regulated by the Financial Conduct Authority.
Click here to return to the newsletter index.