Robert Little of Kirkleatham-based financial experts Bob Little & Co with some timely and valuable advice to consider…
1. Make the most of your ISA allowances
This valuable allowance is £15,240 per person for the current tax year. While you don’t get any tax relief on money you save into an ISA, the money grows tax-free and all withdrawals are tax-free. You can save the full £15,240 allowance in a Cash ISA, a Stocks & Shares ISA or a combination of the two. If you invest in a Stocks & Shares ISA you should seek financial advice because the value of your investments can go down as well as up.
2. Use your pension allowances
Pension contributions are very tax-efficient for people who pay income tax. Each tax year you can save the lower of either your salary or £40,000 into a pension and receive income tax relief on your contributions. Even if you don’t have a salary you can still pay in up to £3,600 per year. Alternatively, your employer can pay into your pension on your behalf – the £40,000 limit still applies but you won’t get income tax relief in the same way. If your employer contributes on your behalf the company may also receive corporation tax relief on the contributions. Pension contributions are a complicated topic, so you should always seek advice before paying into a pension.
3. Use your Inheritance Tax gift allowances
Your estate is the value of your assets (such as your house) minus the value of your liabilities (such as a mortgage). If this value is greater than £325,000 then Inheritance Tax might be payable when you pass away. This £325,000 allowance is called the “nil rate band” and it is the amount you can leave behind free of Inheritance Tax. If you are married or in a Civil Partnership you might be able to inherit your deceased spouse’s or partner’s nil rate band and leave up to £650,000 free of Inheritance Tax. Any estate value over this allowance will normally be taxed at a rate of 40%, which can leave a significant tax bill. Each tax year you can give away certain sums of money in order to reduce the value of your estate. One example of this is the “annual exemption”, which allows you to make a gift worth up to £3,000 (or £6,000 if you didn’t make any gifts in the previous tax year). Using this allowance each year allows you to immediately reduce the value of your estate and lower your potential Inheritance Tax bill. If you don’t use this allowance each year and instead make a single large gift you normally need to wait seven years until the value of the gift is fully removed from your estate.
4. Check your Wills for Will Trusts
Staying on the topic of Inheritance Tax, the Government is expected to introduce a top-up allowance in the new tax year which will benefit anyone who might pay Inheritance Tax and who intends to leave their home to their children or grandchildren. This new allowance will be called the Main Residence Nil Rate Band and will start at £100,000 per person but will increase to £175,000 per person by the 2020-21 tax year. However, this valuable benefit could be lost if you don’t leave your home directly to your children. In the past it was popular to set up a Will Trust within a Will and then leave the family home to the Will Trust rather than directly to your family. If this happens in the new tax year you might not be eligible for the Main Residence Nil Rate Band and this could result in your estate paying more Inheritance Tax than it should.
5. Weigh up the new Lifetime ISA
The Lifetime ISA is due to be introduced in April 2017 and has already caused some controversy due to its rules and restrictions. As the rules stand currently (which are potentially subject to change) you can contribute a maximum of £4,000 per tax year and the government will add a bonus equivalent to 25% of your contributions – so someone who contributes £4,000 will receive a £1,000 bonus. That’s the good part. On the downside, it is only available to people aged 18-40 and it is ultimately intended for retirement or for a house purchase – if you make withdrawals for any other reason you will lose the Government bonus and you will lose 5% of your contributions. Anyone who is eligible for a Lifetime ISA should consider whether this new product, a standard ISA or a pension is the most suitable savings vehicle for them. Each has its own merits and drawbacks, so this decision should not be taken lightly.
Bob Little & Co Chartered Financial Planners