Three things to do before 5 April
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The end of the tax year – 5 April – is a good few weeks away, but now is the time to make sure you have taken advantage of annual tax breaks that work on a “use it or lose it” basis. Here are three ways to ensure you don’t miss out on valuable savings.
1. Boost your pension
The basic rate of income tax is set to drop from 22% to 20% from April 5th. Good news – but as stockbroker Killik and Co points out, this also means that the tax relief basic-rate taxpayers receive on pension contributions will fall by the same 2%. That means putting £100 into a personal pension will cost a basic-rate taxpayer £80, rather than £78. So make sure any lump-sum pension contribution is made before the end of the tax year.
The advice stands for higher-rate payers too. Although ultimately you will still get 40% relief on pension contributions, if you delay until after April 5th, you will have to claim back the extra 2p through your 2008/2009 tax return, meaning you won’t see the cash until early 2010.
2. Use up your Isa allowance
Ideally, all of us should have three to six months’ worth of income stashed away for a rainy day. And cash Isas make a good home for it, particularly now when banks, desperate to attract our money, are offering decent interest rates. You can put up to £3,000 into one of these taxfree accounts, but if you don’t use your allowance, you can’t carry it over to next year. You can also put up to £7,000 (less any savings put into a cash Isa) in an equity Isa, and enjoy any gains free of capital-gains tax.
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3. Reduce your capital-gains-tax liability
Every year you are entitled to shield profits from selling shares – currently up to £9,200 – from capital-gains tax. Unfortunately, you can’t just use up this allowance by simply selling profitable shares then buying them straight back – there has to be a gap of at least 30 days between the two transactions. For many investors, the risk of the shares rising during that 30-day window outweighs the tax benefit of selling and waiting.
However, as Seekingalpha points out, this can be mitigated using exchange traded funds (ETFs) or spread bets. Simply find an ETF or bet tracking the same sector as the investments you are selling, use it as a home for your sales proceeds, and you could still enjoy most of the upside of your original shares during the 30 day prohibition period, while still making use of the tax allowance.
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