Today is an important day because it marks the end of the current tax year. If it’s caught you unaware, you’re probably not the only one. After all, there’s been a lot going on, whether it’s bracing for Brexit, European elections or the longevity of the Trump trade.
These things matter to the global economy and, depending on who you are and what you do, they could matter to your money. But arguably nothing matters more than getting your personal finances sorted in line with the changes marking the end of one tax year, and the dawn of a new one.
Find the time, or make the time, whether you use today’s lunch break or the commute back home.
Here’s a rundown of things you should consider before the clock chimes midnight tonight.
Today is your last chance to shelter £15,240 in an Isa, where your money can grow without you ever facing a tax bill on any income gains or capital growth. With pensions, you can put away £40,000 each year (unless you’re a very high earner) and if you miss this year’s deadline you can carry forward the unused allowance for another three years. But it doesn’t work that way with Isas – these tax-efficient wrappers are known as a “use it or lose it” benefit for good reason.
That’s nice, I hear you say. But life’s getting expensive and you haven’t seen a salary increase in forever, so you simply don’t have that amount of “spare cash” lying around. Fair enough. If this is the case, you can still set up a regular monthly savings plan to get you on track to meet next year’s Isa deadline.
A regular investment plan can start with as little as £50 a month. It also takes the emotion out of investing – making it into a mechanical monthly process provides the discipline to keep saving and reduces the risk of buying at the top of the market or selling at the bottom, which can wreak havoc with your long-term returns.
Thanks to “carry forward” you can take unused pension allowances from up to the three previous tax years and add this to your annual allowance for the current year, giving your pension savings a welcome boost. Bear in mind though that the amount contributed using carry forward should not exceed your total earnings for the year (or you won’t benefit from the tax relief available on pension contributions).
Carry forward can be useful if you’re nearing retirement and want to maximise the amount you put away before you stop work and your income falls. It may also prove particularly valuable for those with high salaries.
That’s because for every £2 that your adjusted income exceeds £150,000, your annual allowance reduces by £1. The maximum reduction to the annual allowance is £30,000, which means it falls to £10,000 when your adjusted income hits £210,000. Broadly, adjusted income includes income from earnings along with returns from investments outside of a tax wrapper and crucially any pension contributions from an employer.
This year the potential for using carry forward is reducing because, after April, the 2013-14 tax year will fall out of the three-year period. That’s important because the annual allowance in 2013-14 was £50,000. You can make pension contributions up until today (5 April 2017) for the current tax year, but it must be in time for your scheme to register the contribution.
If you’re a property owner, you may be gloating over how much your home has risen in value in recent years. But there may be a price to pay in the form of an inheritance tax bill for your nearest and dearest. This is because the threshold at which inheritance tax is due, known as the nil rate band, has not nearly kept pace with the rapid rise in UK property prices. As a result, more and more estates are being drawn into the scope of this tax.
But from tomorrow, there will be an extra allowance for inheritance if the deceased passes on a primary residence, known as the “family home allowance” or “main residence nil rate band”. This will begin at £100,000 in the 2017-18 tax year and increase by £25,000 each tax year, reaching £175,000 by 2021. From 2021-2022 onwards it will increase in line with inflation, as measured by the consumer price index (CPI).
The residence nil rate band is available on top of the existing inheritance tax nil rate band of £325,000. So by 2020-21 an individual will potentially be able to leave £500,000 free of inheritance tax, meaning a married couple or civil partnership will share an inheritance tax threshold of £1m between them – that’s the nil rate band (£325,000 x 2 = £650,000) plus the residence nil rate band (£175,000 x 2 = £350,000).
This change is limited to the family home and only available to children or grandchildren – “direct descendants”. It’s designed to help children avoid selling a family home to pay inheritance tax.
To ensure the change does not discourage the older generation from downsizing, those who sold up after 7 July 2015 will still be able to pass on the proceeds of the family home, provided they lived in the property in question at some point and that assets of an equivalent value are passed on to direct descendants.
While many people choose to leave it down to the wire, when it comes to your investments, it’s typically better to start as early as you can rather than leave it to the very last minute.
Time really is the most powerful force in investment and every extra day you allow it to work on your Isa or pension portfolio is a day that you won’t get back if you let it pass with your money sitting in a low-interest-paying bank account.
By starting at the beginning of the tax year, you give your money an additional 12 months to benefit from the magical power of compounding – that “snowball” effect of building new investment returns on the investment returns you’ve already achieved.
If you missed the boat this tax year, the best thing you can do is make an immediate start on next year’s savings. Tomorrow the annual Isa allowance for the new tax year increases to a very generous £20,000. You’ll have 365 days to make the most of this new opportunity.