Use it or lose it

The current tax year ends on 5 April 2021, so now’s a good time to make sure your finances are in order and book an annual review with your financial adviser. We’ve taken a look at some of the main allowances you’ll need to bear in mind as you prepare for the end of the tax year.

ISAs
An ISA is a tax-free wrapper in which you can hold various types of savings and investments. There are different types and the amount you can place in them without being charged tax (the tax-free allowance) varies. You can spread your money across different types of ISAs, but you can’t exceed the maximum annual allowance of £20,000. It can’t be rolled over to next year, so if you don’t use it, you’ll lose it.

Which ISA is right for you?

Type of ISA	Annual tax-free allowance
Cash – similar to an ordinary savings account but you don’t pay tax on interest you earn.	£20,000
Stocks and shares – offers the possibility of higher returns over the long term if you’re able to take some risks. You can invest in a wide range of securities and funds.	£20,000
Innovative finance ISA – for investing in peer-to-peer loans. The risks can be high and there’s no protection from the Financial Services Compensation Scheme (FSCS).	£20,000
Junior – a way to save or invest for the future of a child under the age of 18. When they turn 18, the account can be converted to an adult ISA.	£9,000
Lifetime – you must be aged between 18 and 40 to open one and the government will pay a 25% bonus if you’re saving for your first property or until you reach the age of 60.	£4,000

Pensions
There’s a maximum amount you can put in your pension tax-free each year. The annual allowance for 2020/21 is £40,000 and includes:

• the total amount paid in to a defined contribution scheme in a tax year by you or anyone else (such as your employer); and
• any increase in a defined benefit scheme in a tax year.

You might be able to carry over your annual allowance from the last three years if you’ve not used all of it. Bear in mind that it may be lower than £40,000 if you have flexible access to your pension pot. You’ll also have a reduced (‘tapered’) annual allowance if:

• your ‘threshold income’ (your net income for the year) is more than £200,000; or
• your ‘adjusted income’ (which includes the value of all your employer’s pension contributions) is more than £240,000.

Capital gains tax
You’ll have to pay capital gains tax (CGT) on your overall gains if they go above your tax-free allowance – otherwise known as the annual exempt amount. The CGT annual exempt amount is £12,300, or £6,150 for trusts.

You may also be able to reduce your tax bill by deducting losses or claiming reliefs, but this depends on the asset, so make sure you ask your financial adviser for more information.

Inheritance tax
The rules surrounding inheritance tax (IHT) are really complicated and it’s important to seek financial advice before making any decisions. For example, you can give away assets or cash worth up to £3,000 a year and there will be no IHT to pay regardless of the total value of your estate when you die.

You can also give as many gifts of up to £250 to as many people as you want each year – although not to anyone who has already received a gift of your whole £3,000 annual exemption. To make use of this exemption, it’s important to keep accurate records.

To learn more about how to make the most of your money this tax year and for more information about your tax-free allowances, speak to your financial adviser.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Key Takeaways

• ISAs are a tax-efficient way to save or invest and there are different types available depending on your needs. Remember that if you don’t use your annual allowance, you lose it.
• You can put a certain amount towards your pension each year tax-free and you may be able to carry over leftover allowance if it’s not been used over the past three years.
• You may have to pay capital gains tax if your overall gains go over the annual exempt amount. The rules can be confusing so make sure you discuss any questions with your financial adviser at your annual review.