Five last-minute tax breaks
1. Use your Isa allowance
This is very obvious, but you have a £15,000 allowance that expires this year, so if you can afford to save or invest do make use if it.
Give priority to income-paying holdings to get the full benefit of the tax shelter.
You can set up an Isa online and start investing within about 10 minutes through brokers such as Hargreaves Lansdown or our sister company Interactive Investor.
However, warns Rebecca O'Keeffe, head of investment at Interactive Investor: "It may be advisable to have your bank approve the funding in advance, as you don't want to find that you miss the opportunity to take out an Isa because your bank is 'protecting' you from unusual spending patterns."
2. Use your capital gains allowance
We all have an annual CGT allowance - £11,000 this tax year – and it makes sense to sell some holdings and realise gains up to the allowance from time to time, in order to avoid the need to pay CGT at up to 28% at a later date.
￼One sensible move, if you have unused Isa allowance, is to 'bed and Isa' non-sheltered holdings. "By selling unwrapped shares or funds and immediately buying them back as a contribution inside this year's Isa, you can harvest gains up to the allowance and then shelter them from further CGT or income tax wrapper," says Danny Cox, head of financial planning at Hargreaves Lansdown.
Again, it's worth giving preference in your Isa to the income-oriented holdings.
"If you bed and Isa shares, the entire process takes minutes," says O'Keeffe.
"However, funds are only priced once a day, so this does take considerably longer and you should leave a number of days for the process to complete.
"Remember, these processes can only be done on a working day, which is particularly relevant this tax year. The tax year ends on Easter Monday, so the last trading day for clients is Thursday 2 April."
3. Use this year's pension allowance
Pensions have the most generous tax advantages of any mainstream investment. Not only do pension holdings grow free of income or CGT, but anything you pay in receives relief at your highest (marginal) rate of tax. Thus, an £800 contribution by a basic-rate taxpayer will be topped up with an extra £200 to make £1,000 of pension.
Put another way, to get that £1,000 contribution, you only need to pay in 80% yourself; the taxman will add the other 20% (which equals 25% of the amount you paid in). Higher-rate taxpayers can claim back a further 20% of the total through their self-assessment form.
If you have other sources to live off, you can pay in up to 100% of your earnings, capped at £40,000, this tax year.
"It takes about 10 minutes to set up a self-invested personal pension (Sipp) online or on the phone," says Cox. Contributions can be made online at any time, though again it's important to be aware of the clash of Easter and the tax year end.
4. Use previous years' pension allowances
On top of your £40,000 allowance for this year, you can also utilise unused allowance (up to £50,000 per year) from the past three tax years. That amounts to an additional £190,000 in total, though contributions must still not exceed your earnings for the year to qualify for tax relief.
Hargreaves calculates that with tax relief of up to 45%, a £190,000 pension contribution could cost a high-earning investor as little as £104,500.
If you exceed your annual allowance in a tax year, you simply account for it using the boxes on your tax return the following January.
Given political pressures to do away with higher-rate tax relief on pensions, there is an argument for capitalising on your pension contributions as fully as possible before the general election in May.
5. Use venture capital trusts
If you're a taxpayer and comfortable with the higher risk involved in investing in a portfolio of smaller, high-growth companies, venture capital trusts (VCTs) are an increasingly attractive option. Shares in new issues held for five years qualify for 30% income tax relief (so an investment of £50,000 would produce tax relief of £15,000), though you cannot receive tax relief worth more than your tax liability.
In addition, dividends are paid out free of income tax, and when shares are sold any gains are tax-free. However, VCTs typically require a paper subscription form and cheque, so you do need to allow time for your application to be received. Moreover, warns O'Keeffe:
"Many VCTs have their own deadline, and because they have fixed offers, some can reach their subscription limits early. So it may not be a good plan to wait until the last minute."
This feature was written for our sister publication Money Observer
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.