Now is the time to use up any tax allowances
With the end of the tax year fast approaching, now is the time to use up any tax allowances and exemptions that you are eligible for. Let’s take a look at what allowances are available and how you can use them to reduce your tax bill. All figures are based on the 2018/19 tax year and have to be utilised before the 6 April 2019.
Individual Savings Accounts (ISAs)
Everyone is entitled to save up to £20,000 tax-free by saving in a stocks & shares ISA, cash ISA, innovative finance ISA, Help to Buy ISA and the new Lifetime ISA. However, be aware that there is a limit on how much you can save in a Help to Buy or Lifetime ISA. For example, you can only save £4,000 per year into a Lifetime ISA. If you have more than £4,000 that you wish to save you could then put any remaining funds into the other ISA options.
Also, the conditions for accessing your ISA can vary between provider, so ensure you choose an investment option that is suitable for your circumstances.
It is worth noting that should tragedy strike your spouse can inherit your ISA free from inheritance tax.
Junior Individual Savings Accounts (ISAs)
Junior ISAs are long-term, tax-free savings accounts for children. They can be taken out for any child living in the UK under the age of 18. You can choose to save into a Junior Cash ISA or a Junior Stocks and Shares ISA or a mix of both.
For the tax year 2018/19, you can save up to £4,260 tax-free into a Junior ISA. The money belongs to the child, and while they can take over the account from the age of 16, they can’t access the funds until the age of 18.
Be aware that you can’t have a Junior ISA as well as a Child Trust Fund. If you want to open a Junior ISA you have the option of asking the provider to transfer the trust fund into it, however, be sure you understand what the implications may be before moving any money into a different type of investment.
You can pay 100% of your income or up to £40,000 (whichever is lower) into a pension, tax-free. You can also carry over any unused allowance from the previous 3 years.
However, if your income is more than £150,000 a year, then the allowance will decrease. It is tapered depending on how much you earn. You can find out more here.
If your spouse or civil partner earns less than their Personal Allowance of £11,850, then they can transfer £1,190 of it to you. Increasing your personal tax allowance for the 2018/19 tax year. You can calculate how much tax you could save as a couple on the gov.uk website.
You can also backdate your claim to include any tax year since 5 April 2015 that you were eligible for Marriage Allowance.
Married Couples Allowance
If you or your spouse was born before 6 April 1935, then Married Couple’s Allowance could reduce your tax bill by between £336 and £869.50 a year.
You can claim Married Couple’s Allowance if all the following apply:
- you’re married or in a civil partnership
- you’re living with your spouse or civil partner
- one of you was born before 6 April 1935
For marriages before 5 December 2005, the husband’s income is used to work out Married Couple’s Allowance. For marriage and civil partnerships after this date, it’s the income of the highest earner.
Everyone is entitled to gift up to £3,000 each tax year, and it will not incur Inheritance Tax. Be aware that for the full amount of money to remain free from IHT you will need to live for more than 7 years from the point that you gifted the money.
You should also bear in mind that your gift could incur other types of tax, such as Income Tax or Capital Gains Tax.
If you don’t utilise the exemption, then you can carry it forward for 1 year. This means that if you did not use it for the tax year 2017/18, you need to do so before the 5 April 2019 or you will lose it.
You can also give small gifts of up to £250 as much as you like, and those will remain free from IHT. Although not if the recipient has already been gifted £3,000 in that tax year. Download MRA’s free guide to find out more about Inheritance Tax planning.
Capital Gains Tax
You’ll get an annual tax-free allowance, known as the Annual Exempt Amount (AEA), for the tax year 2018/19 this is £11,700. Married couples are taxed individually for Capital Gains Tax, however, if you plan to transfer any asset from one spouse to another to reduce your Capital Gains Tax liability, then ensure you understand any implications before doing so.
Donations to charity from individuals are tax-free. You can get tax relief if you donate:
By giving to charity, you could potentially reduce the amount of money you give to the HMRC.
Every year you have a Personal Allowance, which is the amount of money you can earn before paying tax. For the tax year 2018/19, this is £11,850. The allowance will be automatically applied by HMRC.
This means that you can earn up to £46,350 before paying higher rate tax (£11,850 personal allowance plus £34,500 taxable at the basic rate of 20%). If you have not reached the limit for the basic tax rate at 20%, you could consider allocating any bonuses or dividends this tax year if it will still bring you in under £46,350. Rather than having them paid in the next tax year and risk going into the higher tax rate bracket for your earnings.
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