In a world transfixed by the final few weeks leading up to Brexit, it would be all too easy to forget that the end of the tax year will soon be upon us too. The last day of this tax year arrives exactly one week after “Brexit Day” on 29 March.
When it comes to making sure we’ve made best use of the tax free limits available to us on savings and investments, the numbers are all important. Keeping tabs is not always easy, because the amounts we can invest and receive back in interest and dividends tax free each year changes over time and the rules are not always as straightforward as they arguably could be. So here’s a quick reminder of those all important numbers.
Interest on cash savings
This tax year, a basic rate taxpayer can receive up to £1,000 in interest from cash savings tax free. This reduces to £500 for higher rate taxpayers and zero for people paying tax at the additional (45%) rate¹.
Earners on low incomes could also receive as much as a further £5,000 per annum in tax-free interest. However, the amount of £5,000 gets reduced by £1 for every £1 someone earns over their personal allowance (£11,850 in the current tax year)².
Given the low interest rates on cash accounts right now, many people will be receiving interest income below the thresholds at which tax becomes due. So savers tempted by cash ISAs – which automatically shield interest from savings from tax – should, as always, check to make sure the interest rate they’re getting can’t be bettered in a normal cash account.
The Chancellor reduced the maximum tax free amount an investor can receive in dividends in the 2017 Budget, from £5,000 to £2,000³. This lower limit came into effect at the start of this tax year.
This is likely to affect people with sizeable investments held outside tax free or tax efficient investment products.
The current amounts many UK companies and funds pay annually in dividends far exceed the amounts achievable from cash savings. For example, an investor in a company or fund with a dividend yield of 5% would receive annual dividend payments totalling the tax free maximum of £2,000 for every £40,000 invested.
Stocks and shares ISAs
An individual can invest up to £20,000 this tax year into a stocks and shares ISA. So, for a couple, each taking out an ISA, up to £40,000 can be invested in stocks and shares – or, of course, investment funds – without the need to pay any tax on future capital gains or income on the amount invested.
These annual limits first came into effect in April 2017 and haven’t altered since⁴. However, they remain substantial in terms of the amounts most people are able to save annually.
Taking advantage of this tax free maximum amount can be achieved either by investing a lump sum or several lump sums over the course of the tax year, or by committing to save a regular amount – up to £1,666 each month for an individual – via a regular savings ISA.
As usual, it’s important to make sure that you act on your investing plans for this year before the tax year runs out on 5 April. After that, any entitlement to shield investments from tax in this tax year will have gone.
If you’re unsure at the moment about what funds or shares to invest in, a good option can be to use up your tax-free allowance by adding cash to a stocks and shares ISA now, leaving you free to make a decision about what to invest in when you have more time during the new tax year.
As is usual around this time of year, Investment Director Tom Stevenson has recently identified several funds from Fidelity’s Select 50 list of favourite funds that may be of interest to investors seeking ways to diversify existing fund portfolios or even new investors just starting out.
Self Invested Personal Pensions (SIPPs)
Compared with ISAs, for which the tax free investment limit has been raised then left alone over recent years, self invested personal pensions or SIPPs, have fared less well. At least they have in terms of annual allowances and the levels of contributions higher earners can make annually, which have been reduced.
When you make a contribution to a SIPP (out of your taxed income) the government contributes the tax you have already paid on the amount you pay in. This means, for example, a basic rate taxpayer investing £8,000 would see this turn into a £10,000 contribution being paid into their SIPP. A SIPP provider registered with HM Revenue and Customs – like Fidelity – can reclaim this tax for you.
The current limits on SIPP investments this tax year are as follows: Up to 100% of your annual earnings up to a limit of £40,000. However, the maximum amount you can contribute falls by £1 for every £2 earned above £150,000, all the way down to minimum reduced annual allowance of £10,000⁵.
The maximum gift of money you can give to your children or grandchildren without them having to pay tax on it remains set at £3,000 for another year. If you are planning to do this then, once again, acting before 5 April might be important. Any unused part of this “annual exemption” can be carried forward to the next tax year – but only for one year⁶.
Remember, this is just a quick guide, and doesn’t set out all the options available to savers and investors. For investments, Fidelity’s website provides some excellent information on choosing funds, how to open an ISA or a SIPP or how to start a regular savings plan. Whatever the outcome to Brexit negotiations, there are sure to be attractive opportunities for investors with well thought through plans for the future.
¹' ²' ³' ⁴' ⁵' ⁶ GOV.UK, March 2019
The value of investments can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not normally be possible until you reach age 55. This information is not a personal recommendation for any particular product, service or course of action. If you are in any doubt we recommend that you seek advice from an authorised financial adviser.