The dying days of winter are an investor's cue to take stockby Andy Davis / January 27, 2020 / Leave a comment
The deadline to benefit from the main tax breaks aimed at rewarding savers is drawing near. And after a decade of ultra-low interest rates, those savers need all the rewards they can get—so much so that nowadays tax breaks are arguably a bigger contributor for some than the meagre returns from bank or building society accounts. It pays, therefore, to keep an eye on the cut-off date and make sure you take full advantage of the government’s largesse.
The convoluted chain of events that led to our tax year ending in early April has its roots in the late 16th century and reflects this country’s reluctance to align itself with the rest of Europe (does any of this sound familiar?). Whatever the backstory, the dying days of winter are our cue to ensure the major benefits are secured.
Chief among these for most will be maximising their tax-free pension contributions. Those yet to start drawing their pension can claim tax relief on up to £40,000 of contributions per year, although the allowance falls sharply once your annual income gets much above £150,000. You can also carry forward any unused allowances from the past three tax years, meaning that in practice you could make up to £160,000 of tax-free contributions, depending on how much you’ve put in over recent years. This “carry forward” option is a valuable benefit, especially if you expect to receive a large capital gain. Say, for example, you sold a rental property and paid capital gains tax on the proceeds at 28 per cent. Ploughing as much as possible into your own or a spouse’s pension and claiming tax relief at up to 45 per cent could offset a meaningful chunk of that bill.
The final months of the tax year have also become the peak period for Isa contributions, since this £20,000 annual allowance is a “use it or lose it” benefit with no carry-over. Savings rates are so low that cash Isas seem hardly worth the trouble these days, but I continue to put money into Stocks and Shares Isas, where the ability to shelter dividend income and capital gains is worth having.
The third major area I would review every year, depending on your risk appetite, is tax-advantaged investments such as venture capital trusts and the enterprise investment scheme. These let you put money into high-risk early-stage companies and qualify for a large tax break: for every £1 you put in, your income tax bill falls by 30p. It’s a good deal but never forget, tax breaks won’t turn a poor investment into a good one.
Don’t forget also that there are tax incentives to encourage gifts and charitable giving. This is a good moment to reflect on whether you’ve shared as much of your good fortune as you might have. Happy New (Tax) Year.