Tax planning before 5 April

Frozen income tax allowances seem to be a permanent fixture of the tax system now, but there are still valuable tax reliefs available when it comes to investing for your own and your family’s future.

Usually, the most tax-efficient way to invest for your future is through your pension, so, once you have your own pension position sorted out, don’t forget about your spouse and children’s pensions.

You can make pension contributions in respect of family members who do not work (ie have no relevant earnings) or cannot afford them. For example, you could fund contributions for your spouse of up to £2,880 (or more if they work) so that they get tax relief. In addition, if you make contributions to your working children’s pension schemes on their behalf, they get the tax relief and the payments are treated as reducing their taxable income – so it could help them retain the child benefit and tax free childcare if their incomes are close to or over the relevant thresholds.

Have you maxed out ISAs? Stocks and shares held in ISAs do not trigger tax liabilities on either dividend income or any capital gains made on sales. Any UK resident can have an ISA: from age 18, UK residents can invest up to £20,000 each in an ISA, and parents can fund a junior ISA or child trust fund with up to £9,000 per child – (that’s £58,000 for a family of four).

You can also use them for longer term planning – for example, if you have an adult child planning to buy a home, consider gifting funds to them so that they can invest in a Lifetime ISA (LISA). Savers can invest up to £4,000 a year, to which the government will add a 25% tax-free bonus (max. £1,000 a year) towards a first home or as a pension as part of their overall £20,000 ISA annual investment limit.

For more experienced investors, it might be worth looking at investments in Venture Capital Trust (VCT) investments or smaller companies whose shares qualify for the Enterprise Investment Scheme (EIS). As these investments carry a higher level of risk, there are significant tax reliefs available. For example, investments in qualifying EIS companies attract income tax relief at 30% on a maximum annual investment of up to £1 million for qualifying individuals: VCTs also qualify for 30% tax relief on investments of up to £200,000 a year.

With the capital gains tax rates rising and annual exemption now at just £3,000 a year, the capital gains tax advantages such investments offer are increasingly attractive. For example, if you hold EIS shares for three years (or five years for VCT units), any later gain on sale is exempt from capital gains tax.

Equally, if you make a capital gain on selling another asset, you can defer the tax on it by investing in EIS shares. Of course, despite the tax advantages available, it is important to get investment advice from an independent financial adviser.

Read our guide to personal tax planning here or get in touch with our team.