Tax Year Allowances – The old & the new

As we approach the end of tax year (05 April 2013), and approach the new tax year of 2013/2014, you will probably see much in the press, on our website and in our newsletters about how tax allowances and tax rates will change from the start of the next tax year (06 April).

As the old saying goes “there are only 2 things in life which are certain, death and taxes”. With careful financial planning and implementation, you may be able to mitigate the tax you pay on your assets and investments in the future.

I have highlighted below some of the areas where careful use of individual allowances can help with your financial planning, provided they are implemented before the end of the tax year.

Of course, some allowances, such as the ISA are usually renewed each year, so you can use your allowance again early in the forthcoming tax year 2013/2014.

Individual Savings Account (ISA) £11,280 2012/2013 and £11,520 2013/2014

This is the most obvious allowance to most investors, allowing either tax-free savings, via a Cash ISA, or tax efficient investment, via a Stocks & Shares ISA. The only tax which applies to the Stocks & Shares ISA is the 10% dividend tax credit which applies to any dividend income which the investment produces and this is non-re-claimable.

The annual allowances must be used within the tax year or there are lost forever, i.e. “Use-it or Lose-it” basis. In the current tax year (2012/13) an individual (not a minor) has a total allowance of £11,280 of which up to a maximum of 50% can be placed into a Cash ISA with any balance remaining is available for investment into a Stocks & Shares ISA. The total annual allowance for tax year 2013/14 (starting 06th April) rises to £11,520.

Junior Individual Savings Account (JISA)

Being very similar to the adult ISA, the Junior ISA allows a child under the age of 18, who was not entitled to a Child Trust Fund (CTF), to have either a Cash Junior ISA or Stocks & Shares Junior ISA or both but the total annual amount is £3,600. The child owns the Junior ISA and will take control of it after their 16th birthday, however cannot access the funds until after their 18th birthday. This allowance is due to increase in the new tax year 2013/2014 to £3,720.

When the child reaches the age of 18 the Junior ISA will automatically switch to an ISA. Some suggest that this can be a very useful method of saving / investing for future further education/ university fees.

Capital Gains Tax (CGT)
On most assets, whenever an individual buys an asset and realises a gain on the asset then Capital Gains Tax could potentially be applicable. Currently this is set at flat rates of 18% for nil and basic rate income tax payers and 28% for higher and additional rate income tax payers.

However, every individual has the use of an annual capital gains tax allowance, currently £10,600 in tax year 2012/13. This allowance increases in the new tax year 2013/2014 to £10,900.

For reference, Trusts also have the use of a CGT allowance at half the standard individual amount.

Pensions

Relatively recently (06 April 2011), the annual allowance for investments, from all sources, into pensions was severely reduced from £255,000 gross (tax year 2010/11) to £50,000 gross in a year. This annual allowance continues until the beginning of the tax year 2014/15, when it is due to reduce to £40,000 gross.

However, unlike the ISA and the CGT allowance already noted, previous unused years allowance can potentially be carried forward into the current tax year (where available and legislation continues).
Therefore, this option can be attractive to a higher, or additional, rate income tax payer receiving relief at either 40%, or 50%. Advice should be sought from an Accountant to ensure that an individual has the capacity to contribute tax efficiently within the allowances.

Inheritance Tax

Many people are aware of the Inheritance Tax (IHT) threshold, known as the nil-rate band (NRB), per individual is currently £325,000 (2012/13). Above this value, the remaining estate is liable to IHT at a flat rate of 40%.* Many of these people are also aware that the unused portion of IHT NRB is passed to the surviving spouse, or civil partner, to use on their death for their estate.

Making sure a valid and robust Will is in place is a cornerstone of financial planning and you may want to re-visit this issue with your solicitor.

However, what many people are not aware of is the annual gift allowance of £3,000 per donor, which falls outside of their estate immediately. Again, if the previous year’s annual gift allowance has not been utilised then you can effectively gift a total of £6,000.

* You may be able to reduce this tax rate by making a gift from your will to Charity. Please read our webpage ‘Charitable Giving’ for further details.

Summary

The time is of the essence whenever the tax year end is concerned, both to use up available allowance where prudent and possible in this tax year and to look at the new allowances early in the forthcoming tax year 2013/2014.

No individual advice has been provided during the course of this blog. The use of allowances should be planned for carefully and if you would like to receive individual advice on the topics above, then please contact the team at Chapters Financial Limited on 01483 578800.

Simon Hewitt BSc (Hons) Dip PFS
Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
The Financial Services Authority does not regulate Tax advice.