We regularly bring you a column from Simon Read, a personal finance expert with extensive experience in helping people make the most of their money.
We’re into a new tax year and you could understandably be forgiven for thinking, ‘so what?’ But there are two things you need to be aware of.
First is the fact that if you don’t want to fall foul of any new tax laws, you need to be aware of them. Don’t worry, I’ll run through them in a bit.
But second is the opportunity you have right now to get ahead of the game. By that I mean rather than waiting until the end of the financial year to sort out your tax affairs, if you do so now you’ll end up better off – and I’ll explain how.
New tax rates
First, what are the changes in the tax law that have come into effect for the 2018-19 year? Frankly, there’s not a lot, just some tinkering with the tax rates. So the personal allowance – the amount you can earn without paying any tax – has climbed to £11,850.
The basic rate band – the amount you earn on top of your personal allowance and pay 20% tax on – has increased to £34,500. The crucial bit is that means you’ll only start paying the higher 40% tax rate on income you earn this year above £46,350.
Meanwhile, the capital gains tax annual exemption is £11,700 this year and it’s well worth making the most of it if you have assets you’re planning to sell and make a profit on. It’s also worth bearing in mind that if you’re married, your spouse has a similar capital gains tax exemption which may be worth using.
In essence, selling some assets this year could help avoid a tax bill later which could hit if you sell a lot of items at a profit.
Plan early to make the most of tax breaks
That brings us right back to how you can be better off by sorting out your tax affairs now.
To begin with, if you start an ISA now rather than waiting until the deadline at the end of the tax year, you’ll benefit from a whole year’s extra growth on your nest egg. You can stick £20,000 into an ISA now, which would mean an extra £1,000 by the end of the financial year if you managed to get growth of 5% over the course of the next 12 months.
For example, the Funding Circle ISA is now open to all investors, which offers a projected annual return of 7.2% tax-free*. If you were to use your allowance now you could be in great shape by the end of the year.
Thinking longer term, you may want to stick some more money into your pension. It’s not just about building up a decent pot that you’re likely to need in your later years, but also taking advantage of one of the best savings tax-breaks around.
The fact is that contributions to a pension attract tax relief at your highest marginal rate. So if you’re a higher rate taxpayer, you’ll attract tax relief of 40% on any money you stash in your pension. To put it another way, that means that for every 60p you put into your retirement savings, the government effectively tops it up to £1, once the tax relief is taken into account.
If you’re in a decent company scheme, your employer may even match your contributions which would turn your 60p contribution into a £2 addition to your pension pot.
You can put up to £40,000 into a pension every tax year. However, if you haven’t used that allowance in previous years you can use it now to make extra contributions to your retirement nest egg. The so-called carry forward rules mean you can use up pension allowances from up to three years ago. That means in the current tax year you can use up allowances dating back to 2015/16 – but you must do so before 5 April 2019.
If that all seems too much to think about, think about this: there are deadlines to making the most of these tax allowances. If you miss the deadlines, you lose them. But acting now means giving yourself plenty of time to examine your options. And that means giving yourself plenty of time to cash in rather than losing out.
Key things to remember:
- Personal tax allowance is now £11,850
- Higher 40% rate tax threshold is now £46,350
Plan early to make the most of tax breaks
- Using your ISA allowance early will help you earn more
- Take advantage of 40% tax relief on pension contributions
- Carry forward pensions allowance from previous years
The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice.
The information and views contained here are provided solely for informational purposes and should not be construed as legal, tax, regulatory, accounting or investment advice, or as a recommendation or an offer or invitation by Funding Circle.
To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here.
If you have any questions, please speak to your professional adviser or seek independent specialist advice.
*The tax-free entitlement of an ISA depends on the individual circumstances of each investor, and may be subject to change in the future. The projected return is an estimate of what investors could earn on the Balanced lending option, after fees and bad debts. It uses the loans we expect to be funded on the platform, and the estimated bad debt rate of those loans based on our all-time loan data. See the full calculation here. Your actual return maybe higher or lower, and by lending to businesses your capital is at risk.