Tax year end check list for employees

Help employees make the most of their savings and investments

With the end of the tax year approaching there are a few simple things people can do to ensure they make the most of their savings and investments, and set themselves up for the new tax year and beyond.

1. Make the most of your Individual Savings Account (ISA) allowance

You can invest up to £20,000 across all ISAs each year and benefit from tax perks that could boost your savings:

Tax-free saving - any growth in an ISA is tax-free , this includes interest, capital gains and dividends

A government bonus -  the Lifetime ISA (LISA) pays a 25% bonus on every £ you pay in (although there is a lower limit on this kind of ISA of £4,000 per year).

• You can only open a LISA if you are aged 18 to 39 and
• You can only pay into a LISA until age 50.
• The money in a LISA can be withdrawn to pay for an eligible first-time home, or from age 60.
• Withdrawals at other times attract a government  penalty of 25% of the amount withdrawn, so you can end up with less than you paid in.

ISAs can be Cash ISAs that pay a rate of interest like a bank account, or you can invest your money in a stocks and shares or innovative ISA. While a Cash ISA offers a predictable return there is a risk that the real value of your money could be eroded by inflation, while in a stocks and shares ISA the value of investments can go down as well as up, so you could get back less than you paid in.

2. Make the most of pension tax relief

You don’t pay tax on your pension contributions so long as you are under 75. This means that investing £100 costs a maximum of £80 in take home pay, and can cost as little as £55. The amount that can be paid into a pension is limited to £60,000 per year in most cases but any left-over allowance for up to three previous tax years may be used up, to allow even bigger contributions. You can find full details of how much you and others can pay into your pension here.

This annual allowance is reduced in some circumstances:

• If you have an income of more than £200,000, depending on the level of your employers pension contributions, you could be impacted by the tapered annual allowance which gradually reduces to a minimum of £10,000.
• If you have taken benefits from a pension scheme other than as a guaranteed regular income or tax-free cash sum, in which case the Money Purchase Annual Allowance of £10,000 applies.

There is a further limit on your personal contributions to a pension, which is 100% of your relevant UK earnings. If you are saving into a personal pension, including a workplace personal pension, you, or someone on your behalf, can pay in a total of up to  £2,880 (£3,600 with tax relief added), regardless of how much you earn.

3. Think about the family

Its not only you that has the pension and ISA allowances, your partner and children have them too. You can pay into their accounts to provide them with a future nest egg or help them build up their own pension, which could have taken a hit if they’ve taken time off work to look after children or other family members.

If you pay into a pension for someone else they will get the tax relief on the pension contribution not you. You can pay £2,880 for someone who isn’t earning and the government will top that up to the £3600 limit in their personal pension.

Contributions to other people's pensions and ISAs are classed as gifts for inheritance tax purposes and you won't be able to take the money back.

4. Consider capital gains

The maximum gain you can make on an investment outside of a pension or ISA, before you pay Capital Gains Tax is £3,000 in each tax year. If you have investments outside of an ISA or Pension that you are considering selling, doing so before the tax year end could ensure you use up your capital gains tax-free allowance. If you have enough ISA or pension allowance left you could use the money raised from selling the investments to buy the same investments in a pension or ISA, ensuring that future gains are not subject to capital gains.

You might also be able to reduce a capital gains tax liability by gifting assets to a spouse or civil partner. There will be no tax to pay at the time of the gift and they will pay capital gains tax on the difference in value from when you first owned the asset to when they sold it.

Gifting might be advantageous when you and your spouse pay different rates of capital gains tax, or to use up an otherwise unused tax-free allowance.

5. Check your tax code

It’s worth checking your tax code to make sure it’s right but also to check you’re making the most of the marriage allowance. A spouse or civil partner is allowed  to give 10% of their personal allowance to their spouse so long as the receiving spouse is a basic rate tax payer. This is useful if one partner is a non-taxpayer. By transferring 10% of the personal allowance to the taxpayer, the taxpayer will pay £252 less tax. If you’ve transferred 10% of your allowance your tax code will have a letter N at the end, and if you’ve received the extra allowance you will see a letter M. You can find out more here.

6. Review your budget

Pay rises are often aligned with the end of a tax year, some people might also get bonuses at this time. It’s a good time to think about what you do with your earnings and how you can make the most of your money. Things to think about include:

• Can you pay down debt a bit quicker? - Clearing a loan or credit card means paying less interest to your lender, meaning more money for you and your family.
• Could you save a bit more? You might be able to afford an increase the amount you put into an ISA, or take advantage of any workplace saving schemes on offer.
• Could you afford to invest more for your future? Pension saving is tax efficient and, in some cases paying more in can mean your employer pays in more too. Lump sum payments from a bonus are something else to consider.

Some employers offer salary exchange or bonus exchange schemes that make contributing to a pension scheme even more tax efficient, as you won’t pay national insurance on the amount you pay in through these schemes.

Not everything in  this checklist will apply to everyone, but everyone can benefit from taking a few minutes to think about what might apply to them and make a plan to take action in time for the end of the tax year, or in preparation of the new one.