The end of the tax year is an important time for investors. On April 6th, all tax-free investment allowances are reset, meaning that the weeks before are a great time for investors to use as much as possible.
It’s important to understand how much you can invest before the deadline and to plan your contributions accordingly. For example, if you’ve used £18,000 of your £20,000 yearly ISA allowance, you may want to take advantage of the remaining £2,000 and leave all further investments until the new tax year.
Making the most of the current tax year can make a big difference over the long run. The power of compound interest and the inability to roll over any unused ISA allowance – pensions are different, which we will come to – mean that there’s no time like the present when it comes to investing. The difference over a long-term timeline can be stark.
So, here is our breakdown of everything investors need to know before the tax year ends on April 5th.
What is the tax-free ISA allowance?
The tax-free ISA allowance for everyone is £20,000. This means that, every tax year, you can contribute up to £20,000 to your ISA and take advantage of the tax benefits that come with it.
When the tax year ends on April 5th, the tax-free ISA allowance is fully reset for all investors. There is no opportunity to roll over any unused allowance into the following tax year and the unused allowance is lost.
You can use your allowance across different ISA types – stocks and shares, cash, etc. – but you cannot invest into more than one of each type in any given tax year and retain the tax benefits. So, essentially, you have £20,000 each year to allocate to ISA investments on a use-it-or-lose-it basis.
For everything you need to know about ISAs, check out our full guide.
What is the tax-free pension allowance?
In simple terms, the tax-free pension allowance per year is £40,000. This means that, every tax year, you can contribute up to £40,000 to your private pension and take advantage of the associated tax benefits – we’ll explain these below.
There are, however, a few stipulations to bear in mind. For example, your yearly allowance is capped at your yearly salary. If you earn £27,000, this is the most you can contribute in one tax year.
Another stipulation is the pension taper, which only applies to high earners. If you earn more than £240,000 a year, this allowance is tapered. Every £2 of additional income over £240,000 will reduce the annual allowance by £1. The lowest this can go to is £4,000.
Unlike the ISA, however, you can carry forward some of your pension allowance. Carry forward allows you to take advantage of any unused allowance from the previous three tax years. After this, the unused allowance is lost forever.
For all the information you need on pensions, from the taper to carry forward allowances, check out our full guide.
What is the tax-free allowance for a GIA?
For a general investment account (GIA), there is no tax-free allowance. The GIA is most commonly used by those who have used their £20,000 ISA allowance fo the tax year and wish to continue investing in a flexible account.
Investors should see the GIA as a way to continue investing in the services they enjoy after their ISA allowance has been filled. Returns on the GIA may be taxed.
When is the deadline for investing this tax year?
So, you want to make sure that your investments are accredited to the current tax year to avoid missing out on any unused allowances. The key point here is that deadlines can differ based on the type of account and the funding method.
For ISA accounts, the deadlines are as follows:
- First or non-recurring direct debit (8 working days) – Monday 22 March
- Recurring direct debit – (3 working days) Monday 29 March
- Faster payment bank transfer (same day receipt) – Monday 5 April
For pension accounts, the deadlines are as follows:
- First payment into the pension (10 working days) – Thursday 18 March
- Recurring direct debit and single payments with an existing mandate (5 working days) – Thursday 25 March
- Faster payment (same working day) – Monday 5 April
If you have any questions about allowances, deadlines or which investment product is right for you, don’t hesitate to get in touch with a member of our investment consultancy team.