money matters: use it or lose it

AS A new tax year looms, many useful allowances and limits will change or expire. It is important to make full use, if possible, of everything HM Revenue & Customs has to offer us.

Q— What about ISAs?

a — The current ISA limit which may be paid in the 2013/2014 tax year is £11,520 and is available to all UK residents aged 18 or older.

Up to £5,760 of this may be invested in a cash ISA, with the same amount allowable into a stocks and shares ISA. These do not literally need to be invested in stocks and shares. There are many investment funds into which the “stocks and shares” ISA may be invested, in order that the precise investment can be tailored to the level of risk you are prepared to take.

Alternatively, the full £11,520 may be invested in a stocks and shares ISA.

If invested in cash ISAs, it is worth reviewing any attractive fixed rates that were offered when the monies were invested, as ISA providers are in the habit of reducing these back down to derisory levels of interest once the fixed-rate period has expired.

Q — Can I invest in an ISA for my children?

a — Yes. Junior ISAs are now available for under18s.

There are two options: a cash ISA or a stocks and shares ISA. These can be invested on behalf of children by third parties, such as parents or grandparents.

As a reminder, money invested in ISAs grows free of any income or capital gains tax. Any income drawn from an ISA is not subject to income tax.

Q — Should I make additional pension contributions?

a — Any personal contribution you make prior to April 5 will attract tax relief at your relevant rate of tax which, of course, is based on your overall income in the current tax year.

Depending on your level of earnings, there may be opportunities for contributions which can lead to eliminating any 40% income tax liabilities you may otherwise have had to pay.

Any contribution would be made net of basic-rate tax relief, with higher-rate relief being obtained via your annual self-assessment tax return.

For those ear ning higher levels of income, in particular those earning in excess of £100,000 per annum and therefore losing their personal tax allowance, this may be particularly attractive.

The personal allowance is lost at the rate of £1 for every £2 earned over £ 100,000, which means anyone earning over £118,880 will forfeit all of their personal allowance.

If a pension contribution is therefore made which reduces the level of taxable income back down below £100,000, the individual will recoup the previous “lost” personal allowance and receive an effective rate of tax relief of 60% on this £18,880 slice of pension contribution.

Q — Can I pay too much into pensions?

a — Pensions should only ever form part of your overall long-term savings.

However, there is a ceiling placed on the amount anyone can save into pensions, which is set at £1.5 million. This has already been reduced from a ceiling of £1.8m and will reduce further from April 6 2014 to £1.25m.

It is possible to “ringfence” your fund if it is likely to exceed the new lower amount so that it will still be subject to the current £1.5 million limit. This ‘fixed protection’ can be applied for by using a form of APSS228 available from HMRC website. Conditions apply, and it is important anyone considering such action should seek advice from a suitably qualified financial adviser.

Q — My partner is not working but would like to save in a pension for retirement, can this be done?

a — Yes, although there is an overall limit of £3,600 which can be paid into a pension of a non-earner.

This contribution can also be paid by a third party, but tax relief on the contribution is only available at the basic rate of 20%, whether or not it is paid by a higher-rate taxpayer.

Again, therefore, there is a deadline approaching for this year’s contribution of April 5 2014.

Q — Is there anything else I should be thinking about prior to April 5.

Q—Yes: capital gains tax, where the current annual exemption is £10,900 of gains.

If you have potential investment gains, it is worth taking professional advice on this issue, as the timing of disposing of investments and realising any gains either side of April 5 can be extremely beneficial.

The above is by no means an exhaustive list.

l By David Legge of Henderson Loggie Financial Services Ltd, which is authorised and regulated by the Financial Conduct Authority.

Any references to tax and legislation are based on our understanding of law and HM Revenue & Customs practice at the date of publication. Tax and legislation are liable to change. Tax relief may be altered, and the value to the investor depends on their financial circumstances. The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.