Have you made the most of this year’s tax breaks?

Saving for the future isn’t always easy – in fact, most of the time it’s quite difficult. After you’ve made the sacrifice to put the future you first, it’s important you make the most of the generous tax incentives available to make your money go as far as possible.

There are just two things in life that are certain: death and taxes. But just because something is inevitable, doesn’t mean people understand it. There are generous tax breaks available to savers who know where to look.

Remember you probably have a personal savings allowance, which allows you to earn up to £1,000 in interest tax-free. Before, you would have had to hand over at least £20 of every £100 earned in interest to the taxman, £40 if you were a higher rate taxpayer.

Today, basic rate taxpayers can earn £1,000 tax-free and higher rate taxpayers have an allowance of £500. Additional rate taxpayers don’t  have an allowance.

What tax you might have to pay

When you invest, you might be expected to pay tax on the profit you make. Capital gains tax (CGT) is charged on the profit you make from an increase in the value of your investments, and you’re also taxed on any dividends you generate from your portfolio.

In the 2017/18 financial year, you have a dividend allowance of £5,000. After this, you’re taxed either 7.5%, 32.5% or 38.1% depending on your income tax band. Remember, the dividend allowance is falling to £2,000 in the 2018/19 financial year.

Investors also have an annual CGT allowance of £11,300 to make the most of. If you make a profit of over £11,300 in one year, you’ll probably be liable to pay CGT between 18-28% depending on your financial circumstances.

These allowances look big at first glance, but are a much more realistic scenario when you’re investing for the long-term. After you’ve made your money work harder for you, the last thing you want is to give the taxman more than you have to.

That’s why we’ve created this simple checklist to help you make the most of the tax benefits available to you before it’s too late.

Maximise your returns with an ISA

Your money can grow tax-free if you put it in an Individual Savings Account (ISAs). There are a number of different ISAs available to you, although savvy savers are increasingly turning to stocks and shares ISAs in a bid to offset the impact of inflation on their savings.

Whilst interest rates were lifted off their record lows by the Bank of England late last year, easy access cash ISAs are still offering negligible returns – especially when pitted against inflation. Whilst Money Saving Expert shows the best returns on offer at around 1.16%, inflation is currently at 3% – well above the Bank of England’s 2% target.

You can invest up to £20,000 a year in your ISA, and any growth in the value of your investment and any income can build up tax free. You can’t carry your ISA allowance into a new financial year, however, so make sure you make the most of it whilst you can.

As your annual ISA allowance is individual, together you and your partner have a £40,000 allowance to maximise.

Pension tax relief

The government wants to encourage you to save for your future, that’s why they offer you tax relief on your pension contributions relative to your tax band.

This means a basic rate taxpayer needs only pay £8,000 for a £10,000 contribution into their personal pension. If you’re a higher rate or additional rate taxpayer, you can claim back even more through your annual tax return.

Imagine you get paid £1,250 from your employer. You hand over £250 to the taxman as the basic rate of tax. You then decide to invest the remaining £1,000 straight into your pension.

The government tops up your contribution with the £250 (20%) they assume you paid in tax, which is equivalent to 25% of your net savings when added back on. If you’re a higher rate or additional rate taxpayer, you can claim back even more through your annual tax return.

What does this mean for your pension contributions? Well, this is equivalent to a higher rate taxpayer paying £6,000 for a £10,000 contribution and an additional rate taxpayer paying just £5,500 – although the additional relief is reflected in your tax band and isn’t paid at source.

You’re allowed to put the equivalent of your annual salary or £40,000 in your personal pension each year, whichever is smaller. By setting a budget and sticking to it, you can easily maximise your savings and grow your money for the future.

Inheritance tax allowance

Whilst some families are putting themselves at risk of unexpected large tax bills by not understanding the basic rules of inheritance tax, others are missing out on the tax benefits to help secure their family’s wealth in the future.

You can gift your children £3,000 in one year, although you have to live for seven years for it to not be counted as part of your estate and add to your inheritance tax bill. Unlike the ISA allowance, the annual tax-free gift allowance can be carried over to the next 12 months if unused, although only for one year.

If you gift this money, make sure the person you’re giving it to makes the most of their tax allowances too, either by putting it in a JISA, ISA or their own pension.

Make your life easy and transfer

If you’ve used different ISA providers each year, it can be difficult keeping track of your investments and whether you’re being savvy enough with your money. Transferring your ISAs into one place makes it easier to keep on top of your investments and doesn’t impact your annual allowance.

It’s important to balance the amount you can save against any tax, management fees and your potential for returns. Expensive and unexpected charges can eat into your return, which is why digital wealth managers like Moneyfarm are becoming more popular with investors wanting simplicity and transparency when it comes to their investments.

Moneyfarm aren’t tax advisors and tax treatment is dependent on an individual’s personal circumstances. If you’re unsure what to do, please seek independent financial advice.

Tax year-end checklist

To help you make the most of your tax allowances this year, we’ve made this simple table for you to keep.