According to estimates by the Institute for Fiscal Studies, up to two million more people will have been drawn into the higher rate tax band by 2015/16 since the start of the Coalition. With personal taxes for middle income and higher earners likely to remain high, it is all the more important for savers and investors to utilise their various tax free annual allowances while they can. With the 5 April tax year deadline just days away, it is decision time for investors contemplating a contribution to an ISA, pension or seeking to utilise other annual allowances.
Below are a number of practical tips to help you beat the tax year deadline:
1. ISAs: Act fast to make your contribution…. but don’t hurry to select your investments. It’s human nature to leave important decisions to the eleventh hour, however a rushed decision on which asset class, market or fund to invest your ISA in could backfire. If you feel you need more time but don’t want to lose your allowance, open your Stocks & Shares ISA with an initial holding in cash. Having secured your allowance, you can then invest it later when you are comfortable with your investment choices. To review your existing investments and find out where your portfolio may need further attention, try our free investment report service at www.bestinvest.co.uk/first
2. Consider utilising your capital gains tax allowance. Each individual can crystallise gains from the sale of an asset of up to £10,900 this tax year without having to pay any tax. If you don’t have spare cash to invest in an ISA but do own investments in shares, funds or investments outside of a tax-free wrapper then consider selling some or all of these to utilise your annual capital gains tax allowance to then reinvest the proceeds into an ISA. This process is called “Bed and ISA” and is a great way to slowly migrate your hard earned savings and investments beyond the reach of the tax man.
3. Pensions are attractive but the annual allowance is about to be cut, so act now to benefit and mop up any unutilised allowances from the previous three years. Pensions remain unrivalled in terms of the tax perks on offer, especially for those subject to 40% or 45% tax rates – but there is no guarantee this will remain the case in the future. From 5 April the annual gross pensions allowance will drop from £50,000 to £40,000 so higher earners should consider taking advantage of the higher contribution level while they can.
Some investors may also be able to invest more than £50,000 by 5 April and save further amounts off their current year tax liability. This is because where they have any unused pension allowances from the previous three years these can carry forward to the current year once this year’s pension allowance has been fully used up. In theory, that could mean a maximum pension contribution of £200,000 before 5 April, subject to effective relief at your marginal rate.
4. Avoid the postal service and invest online. The postal service is sadly not always reliable and a small mistake on a paper based application form can foil your best endeavours to secure your ISA and pensions allowances. The simplest and lowest cost way to invest in an ISA or pension at the eleventh hour is to do so online. The process of opening an ISA or SIPP is very quick (we estimate three minutes) and you will receive instant feedback on whether your application has been accepted.
5. Check remaining VCT capacity before sending in your application. VCT demand has been considerable this tax year as the UK recovery has fuelled confidence in smaller companies and investors are attracted by the 30% tax credits and tax-free yields available. Aimed at more experienced investors, up to £200,000 can be invested into VCTs this tax year, providing a maximum tax credit of £60,000. However, VCTs and other limited capacity investments such as EIS and Seed EIS can fill up rapidly in the final days of the tax year, so it makes sense to check how close a VCT is to achieving its fund raising target before submitting your application. Current VCT offers with summaries of funds still available can be viewed at www.bestinvest.co.uk/vct
6.If you do use the post, use the Special Delivery service or a courier. Some investments, such as VCT applications are not available for online applications and can only be submitted by paper based forms. To maximise your chances of making a successful application, it makes sense to either use a courier or the Royal Mail’s Special Delivery service which commits to next day delivery with online tracking. Do not use free reply-paid envelopes during the final days of the tax year as these typically take longer than normal mail.
7. Make sure you have cleared funds in your account as you cannot invest with a credit card. When investing online, it is vital that you have cleared funds in your bank account as you must purchase an ISA with a debit card and cannot use a credit card. For investors hoping to beat the deadline, this may mean moving funds a couple of days ahead – so act now! Bank fraud departments can sometimes block unusually large transactions, so it may make sense to inform your bank ahead of making your application.
8. Payment must be from a UK bank account in the name of the applicant (or joint account). A friend, relative or company cannot open an ISA on your behalf, so it is important that the payment is made with a debit card in the name of the applicant (or parent/guardian in the case of a Junior ISA) as this will form part of the identification checking process required under anti-money laundering regulations. If you are making a paper-based application and intend to use a building society cheque, then ask your building society to include your name on the cheque or your application may be rejected.
9. Make sure you know your National Insurance number. A NI number is required to open an ISA. If you don’t know your number, this can usually be found on your pay-slip.