With just over three weeks until the end of the tax year, prudent savers will be making sure they have made the most of all their savings allowances.
However, there are a number of financial planning opportunities that people might be less familiar with. Tom Selby, senior analyst at AJ Bell, takes a look at seven tips that are worth considering as we head towards 5 April:
ISAs
1. Add £12,336 to a Junior ISA
2. Update your ISA direct debit
Pensions
3. Making contributions having used the pension freedoms
4. Last chance to carry forward £50,000 of pension annual allowance
5. Last chance to apply for Individual Protection 2014
6. Get a state pension forecast because it changed with effect from this tax year
Tax
7. Record the value of dividends you received in the year
ISAs
1. Add £12,336 to a Junior ISA
Investors may be aware that they can contribute £4,080 per year to a Junior ISA or a Child Trust Fund. But for parents considering switching their children’s CTFs to JISAs there is a welcome quirk in the rules that could let them pay in three allowances over a short time period to maximise the amount they are sheltering from the taxman.
Example:
Jane has a daughter Amelia. Amelia was born on 1 May 2004 and has a CTF. Jane would like to transfer Amelia’s CTF to a Junior ISA as she wants access to a wide range of investment options.
Unlike a Junior ISA, where the allowance period is aligned with the tax year, the CTF annual allowance period starts on the child’s birthday and ends the day before their next birthday.
So Jane could put £4,080 into Amelia’s CTF before 5 April 2017, a further £4,128 into Anna’s CTF on or after her birthday on 1 May 2017 and then transfer the CTF to a new Junior ISA account. Once the transfer has been completed, Jane can then pay another £4,128 into the new Junior ISA in the 2017/18 tax year.
2. Update your ISA direct debit
The ISA allowance jumps from £15,240 to £20,000 on 6 April so any savers who want to continue making maximum contributions via a direct debit need to ensure these are updated when the allowance increases.
Over time the effect of increasing annual subscriptions and the extra investment growth really adds up. If you invested the maximum £15,240 at the start of this tax year and left your direct debit unchanged for 20 years you would have a fund of £472,000 based on 4% growth after charges.
However, if you increase the direct debit to £20,000 from April 2017 based on the same growth your fund would be worth £619,000 after 20 years, even if there were no further increases in the ISA allowance.
Pensions
3. Making contributions having used the pension freedoms
Anyone who has flexibly accessed their pension benefits using the pension freedoms is restricted to making contributions to money purchase schemes for tax relief purposes of £10,000 a year. (This is known as the Money Purchase Annual Allowance or MPAA.)
However, the Government seem intent on reducing this limit to £4,000, with this lower level likely to be in place for 2017/18. People who have triggered the MPAA should therefore consider making a contribution of up to £10,000 in this tax year before the limit is lowered.
4. Last chance to carry forward £50,000 of pension annual allowance
The 2013/14 tax year was the last year to have a pension annual allowance of £50,000. People who have not used this already have until 5 April 2017 to get a contribution into their pension or the opportunity is lost forever.
This is particularly valuable for high income individuals who may have an annual allowance as low as £10,000 in the current tax year under the tapered annual allowance rules.
In order to use carry forward, the current year’s annual allowance must first be used. So, in 2016/17 savers must first use the £40,000 annual allowance before going back to 2013/14 to mop up any unused allowance from that year. Those affected by the taper only need to use their tapered annual allowance from 2016/17 before having the ability to go back and use unused allowance from 2013/14.
It is important to remember that you can only get tax relief on personal contributions up to 100% of your earnings.
5. Last chance to apply for Individual Protection 2014
In 2014 the lifetime allowance dropped from £1.5m to £1.25m. In 2016, it went down further to £1m.
Individual Protection 2014 protects the investor’s fund value as at 5 April 2014 from the lifetime allowance charge up to a maximum of £1.5m. It is still possible to apply to HMRC for this protection, but only up until 5 April 2017.
With Individual Protection 2014 it is still possible to make contributions without revoking the protection, so it may still be suitable even for people who have built up pension benefits in the last 3 years.
6. Get a state pension forecast because it changed with effect from this tax year
The State Pension changed for people who became entitled to it on or after 6 April 2016, in other words men born after 5 April 1951 and women born after 5 April 1953. For these people, the Government has introduced a new State Pension of £8,092 per year.
However, not everyone will get this amount. People who were contracted out of the state pension in the past or don’t have at least 35 years of qualifying National Insurance contributions may get less.
Anyone aged 50 or over can now request a state pension forecast from the Government’s Future Pension Centre by phone or by post. Alternatively, they can use the new online service, which also shows their history of National Insurance contributions to see if they have any gaps over the years.
https://www.gov.uk/check-state-pension
Tax
7. Record the value of dividends you received in the year
In the Budget, Chancellor Hammond controversially decided to cut the new tax-free dividend allowance from £5,000 to £2,000, meaning more people will have to pay tax on dividends at the following rates:
7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band
Investors with large portfolios or those with a high proportion of income-producing investments may find themselves with a higher tax bill at the end of the year. Anyone who finds themselves with a tax bill has to pay it via a self-assessment tax return. This applies even if they are a basic rate taxpayer (previously only higher and additional rate tax payers had to report it via self-assessment). It therefore makes sense to check and record these details at the end of the tax year.