The end of tax year obviously is of particular significance when managing your finances and investments and offers planning opportunities for each individual. The below checklist is not meant to be exhaustative but rather a memory jog of the key planning areas which might be achievable this late in the day. So pen at the ready…
- Pay into your pension – In short, pensions offer a tax efficient way to invest for your retirement. Not only do the funds within a pension grow tax-free but any contributions you make into the plan receive income tax relief at your highest marginal rate. So in simple terms if a basic rate tax payer pays £80 into his pension the tax-man tops this up to £100. Similarly for a 40% rate tax payer a £100 contribution into his pension fund actually only costs him £60. However, while this seems a great deal, which it is, the trade of is that you won’t be able to access your pension fund until you are 55 and even then only 25% of it can be taken as a tax free lump sum. The rest has to be used to provide you with a retirement income. The tax-year end sensitivity comes from the annual limits placed on the amount you can put into a pension fund. More details can be found here on the FSA website. But people who earn over £130,000 a year need to be careful as anti-forestalling measures announced by the previous Government have limited the amount of tax relief they will receive on their contributions. In addition, new changes to pension rules from 6th April mean that you will only be able to contribute up to a maximum of £50,000 per tax year (even if your earnings are well above this). In theory, there are people who may want to and be better off pumping more than this into their pension plan before the new limits come in. But be warned the rules around the changes are very complicated (for more info click here) with potentially large tax pitfalls if you get things wrong - so get on the phone to a decent financial adviser ASAP.
- Retire – as a result of the new pension rules the current income drawdown option is being replaced by two new options, from 6th April, with different rules and regulations. Consequently some people may find that they would be better off retiring under the current drawdown regime ie before 6th April 2011. So if you are thinking about taking pension benefits from your SIPP in the near future seek advice ASAP.
- Pay into your spouse’s pension – even non-earners such as housewives can get tax relief on pension contributions. A non-earner can pay £2,880 each tax year into a pension and receive an additional £720 from the tax man (effectively free money!). So bringing their total gross contribution up to £3,600. I cover this topic in more details here.
- Boost your state pension - Around 70,000 people, mainly women, have two weeks left to boost their basic State Pension and get backdated payments. People who have reached, or will reach, State Pension age between April 2008 and April 2011 and don’t get a full basic State Pension, could increase their payment and get it backdated, if they buy back National Insurance contributions by 5th April 2011. The special offer allows this group to buy back up to six years of voluntary contributions as far back as 1975. After 6th April 2011 it will be more expensive to buy back missing years and boost your state pension, plus the increase will not be backdated. For more information see the Department for Work and Pensions website.
- Register for child care vouchers - Your employer may offer you childcare vouchers (including vouchers in return for a reduction in your pay - known as a 'salary sacrifice') to help with your childcare costs. Childcare Vouchers are exempt from National Insurance and income tax up to £243 a month for everyone and can save parents a tidy amount of money, as much as £1,000 a year. However, after April 2011 higher rate income tax payers will only be able to make the same tax savings as those paying basic rate tax. This will be implemented by restricting the level of tax exempt vouchers that higher rate tax payers can receive. But if parent join a scheme before the 5thApril no such restrictions apply. So act now or lose out. Going forwards child care vouchers might be important way to avoid the proposed child benefit cuts.
- Use you annual ISA allowance - Click here to see my previous post covering using your ISA allowance. In addition, check out my post Money tip #28 – How to beat the ISA deadline and save money (even if you haven’t decided which funds to invest in).
- Utilise your Capital Gains Tax (CGT) allowance – If the value of your investments have increased enough during the current tax year to exceed the capital gains tax allowance of £10,100, you may want to consider selling enough of your units or shares to use that allowance. This will help you reduce any future tax liability. For other ideas on how to cut your CGT bills then read my post How to realise capital gains without paying tax.
- Reduce you Inheritance Tax (IHT) bill – there are a number of annual IHT allowances which are tax year sensitive. By using them you can reduce any potential IHT bill payable on your death. Each tax year you can:
- give away £3,000 of your capital, and if you don’t make use of your exemption in one year you can carry it forward to the next year, for one year only.
- make gifts of up to £250 a person (although this cannot be used in conjunction with any other inheritance tax allowance).
- give away £5,000 to a child who is getting married.
- For other ways that to reduce your tax bill see my 15 ways to cut your Inheritance tax bill.
As always you should seek financial advice if you are unsure as to the suitability of an investment or a course of action. And to make sure your friends and family don't get caught napping at the end of the tax year why not share this article with them using the various methods below.