T A X Y E A R - E N D P L A N N I N G D O N ’ T D E L A Y : A C T B Y 5 A P R I L Wherever you’re heading, get there sooner by making the most of your tax allowances and reliefs before 5 April. Y O U R G U I D E T O T H E 2 0 2 0 /2 1 TA X Y E A R Take a step in the right direction. Keep moving towards your goals Where are you heading in life? That’s a question that many of us have been asking ourselves over the past year. If you know the answer, one thing’s for sure – having a solid financial foundation and ensuring your money is working as hard as possible for you and your loved ones will really help. Your destination might be near, or far – but the good news is that you can take the right financial steps to get there. So, whether you’re just at the start, or already a long way down the road, the most important thing right now is to take action before the end of the current tax year, on 5 April . That way you can ensure you’re making the most of your current tax allowances and reliefs, which can go a long way to helping you secure your long- term financial goals. Although it’s impossible to predict the future accurately, it’s worth bearing in mind two important things as you go. Firstly, in the aftermath of the COVID-19 pandemic, most experts agree that the government will soon be raising taxes (maybe from the start of the next tax year on 6 April) – which means current allowances and reliefs may no longer be so generous. Secondly, despite a turbulent year for stocks and shares, investing for the long term (five to ten years or more) could give you a better return for your money than keeping it as cash – and the world’s stock markets are already starting to recover well from the shocks of 2020. Many of these things might feel like they’re beyond your control. But you can control the actions you take towards making your money work as hard as possible for you. So don’t delay. Turn to the next page now, choose a destination (or more than one) that’s closest to where you’d like to be, and we’ll show you what you need to consider before 5 April to help to get you there. With best wishes for a happy and prosperous 2021. 3 Then turn to the simple steps listed under each (which you’ll find on the following pages) to help you get there. It might be a question of doing something for the first time, such as starting a Stocks & Shares ISA. You could also review the things you’re already doing, such as topping up your pension. Whichever steps you take, don’t forget to make the most of your valuable reliefs and allowances before the end of the current tax year on 5 April. Retire in style For example, if you’re thinking about: • Living life to the full in retirement – even if you’re not there yet • Making sure you won’t run out of money after retiring • Ensuring your investments are working as hard as possible for you and your loved ones now Consider: Pensions, ISAs, your Personal Savings Allowance, Capital Gains Tax and dividends Build a foundation For example, if you’re thinking about: • Starting to invest in order to make your finances work harder for you • Buying your first home • Planning for a family Consider: ISAs, your Personal Savings Allowance and pensions Pass on your wealth For example, if you’re thinking about: • Helping your family avoid paying too much Inheritance Tax when you die • Giving your loved ones a good start in life • Continuing to get the most out of your retirement Consider: Inheritance Tax and Junior ISAs Secure your and your family’s financial future For example, if you’re thinking about: • Making the most of your investments • Giving your children a good start in life • Your path towards a comfortable retirement Consider: ISAs, Junior ISAs, your Personal Savings Allowance, pensions, Capital Gains Tax and dividends Whatever your destination, the time to act is now Act now to avoid paying too much tax! Wherever you are in your journey through life, just choose the destinations that are closest to where you’d like to be in the future. 5 4 When considering investing in a Stocks & Shares ISA, it’s important to remember short-term volatility is an inherent feature of equity markets. There is always the potential for the value of an investment to rise or fall sharply, so it’s important to think of this as a long-term investment. The chart below illustrates the best and worst annualised returns for the FTSE All-Share Total Return Index over different holding periods since 1985. As you can see, the variance and volatility in returns over one year can be extreme. ISAs can be a great way of making your money work harder for you, as everything you earn from them is free of Income Tax and Capital Gains Tax – so you won’t pay tax on your interest, withdrawals or profits. You can put up to £20,000 per person into an ISA this tax year (ending 5 April). They’re also a great way to start investing in stocks and shares – because, as well as giving you all these tax benefits, they’re very simple. The only downside is you can’t carry forward any ISA allowance you don’t use this year. Flexible tax-efficient savings Investing for the long term Past performance is not indicative of future performance, and the value of your investment, as well as any income, may go down as well as up. You may get back less than you invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation. ISAs The two most well-known ISAs are Stocks & Shares ISAs and Cash ISAs. Both kinds offer a more flexible way of saving for the future than putting money into your pension pot, as you’re able to access your savings whenever you like – an option that’s not available with a pension. If you’re prepared to keep your money in your ISA for at least five years (or longer), Stocks & Shares ISAs can be a great way to go. That’s because, over the long term, stock markets tend to rise – so as long as you don’t need to access the money any time soon, Stocks & Shares ISAs have the potential to give you a greater return, particularly as interest rates are currently so low (see ‘Investing for the long term’, on the next page). The other thing to bear in mind is every saver’s worst enemy: inflation. Even though average price increases are low at the moment, nearly all interest rates for cash savings are even lower. This means that, over time, the value of your cash would actually go down in real terms. You should therefore consider only keeping the amount you need for emergencies in cash (see page 10 for more on this). Stocks and shares or cash? FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings invest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. So use it or lose it before 5 April. However, investors who commit to a long-term strategy can even out the peaks and troughs to generate returns that are far more consistent over time. B u i l d a f o u n d a t i o n S e c u r e y o u r f u t u r e R e t i r e i n s t y l e Read this now if you’re aiming to: 7 6 Source: Financial Express. Data for the FTSE All-Share Total Return Index from 31 December 1985 to 30 November 2020. 0% 2 4 6 8 10 12 14 16 18 20 -20% Years 20% 40% 60% Best return Worst return Best and worst annualised returns over different holding periods Junior ISAs (which allow you to save money tax-efficiently for children up to the age of 18), are a great way to give the kids in your life a good start. As with other ISAs, everything you put in a ‘Junior ISA’ is free of any further liability to Income Tax and Capital Gains Tax. Another benefit is that by gifting money to your children, you’re removing money from your own estate, which could help avoid, or reduce, the amount of Inheritance Tax payable when you die (see page 18 for more on this). They’re also a great way to watch your money grow, year after year, like the diagram shown on the right. This is based on growth after charges of 2.4% per year. The figure is an example only and not guaranteed. It is not a minimum or maximum amount. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this. Topping up your ISA now can really help you to achieve your long-term goals, particularly if you consider investing in stocks and shares. Contact your St. James’s Place Partner for more advice on how you can make the most of your ISA allowances before the end of this tax year on 5 April. Give your children a head start With a pension, you may have to pay Income Tax on some of the money you withdraw from your pot, and you can’t access the money until you’re at least 55 – but you can take money out of an ISA at any time and, when you do, all of it is free from Income Tax and Capital Gains Tax. Find out more about pensions on page 12. You can invest up to £9,000 this tax year in a Junior ISA, so don’t miss the deadline of 5 April to make the most of your allowance. The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances. Your next step now ISAs can also be a great way of supplementing savings for your retirement. Your ISA allowances for 2020/21 Did you know? You can pay up to £20,000 per person into an ISA this year – so that’s £40,000 for a couple who each hold an ISA – and £9,000 into a Junior ISA per child. This can be either stocks and shares, or cash, or a mixture of both. All ISAs and Junior ISAs are free of Income Tax and Capital Gains Tax – so you don’t pay these taxes on interest, withdrawals or profits. That tax benefit is ‘use it or lose it’ – you can’t roll it over into another year. So, think about opening an ISA, or topping up your existing ones, before 5 April if you can. Junior ISAs What investing £3,000 per year (or £250 per month) could be worth 5yrs £16,000 £34,000 £67,000 10yrs 18yrs Capital invested Total return 9 8 S e c u r e y o u r f u t u r e Read this now if you’re aiming to: P a s s o n w e a l t h The Personal Savings Allowance means you don’t have to pay tax on some of the interest you receive from your cash savings accounts – up to £1,000 a year for those paying the basic rate of Income Tax and up to £500 a year for higher rate taxpayers (but there is no saving for additional rate taxpayers). As interest rates are currently so low, that means you can hold a lot in a cash savings account before you would end up paying tax on the interest. It’s really important to have an ‘emergency fund’ of cash that you can access quickly in case disaster strikes. So the good news is that, thanks to the Personal Savings Allowance and low interest rates, you can still hold plenty of cash without needing to use up your ISA allowance to keep the interest tax-free. You could therefore use your ISA to invest in stocks and shares instead, which over the long term can be more lucrative (see page 6 for more on this). You should also bear in mind that it’s unwise to hold more than £85,000 per person in any single cash account. If the financial institution stopped trading, the Financial Services Compensation Scheme will guarantee your money up to that limit, but anything over that could be lost. Using your cash savings wisely How much should you have in your emergency fund? Most experts recommend that you should hold between three and six months of your basic living expenses in an emergency cash fund that you can access instantly. This will cover you, for example, if you were to lose your job or be hit with an unexpected expense. You should always prioritise building up this fund before making any other investments and only dip into it in genuine emergencies. When working out how much to keep in this fund, take into account things like mortgage or rent payments, grocery bills, utility bills and loan payments. However, it’s also important not to hold too much here. When interest rates are below the rate of inflation, as they are currently, the amount you hold will decrease in value over time. Therefore, you’re often better off investing anything extra in stocks and shares (for example through an ISA or pension), so your money can work harder for you over the long term. Having an emergency fund that you can access quickly is crucial, and the Personal Savings Allowance and low interest rates mean it makes sense to use a cash savings account – that way you can use up your ISA allowance in a more lucrative way. Contact your St. James’s Place Partner for advice on how best to balance your savings and make the most of your ISA allowance before the end of this tax year on 5 April. Your next step now An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances. The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. Your Personal Savings Allowance for 2020/21 Basic rate taxpayers can get up to £1,000 per year of interest tax-free. For higher rate taxpayers, it’s £500 per year. There is no allowance for additional rate taxpayers. Personal Savings Allowances If you pay higher rate Income Tax, this is the amount you could hold in the top-paying easy-access savings account while still receiving tax-free interest. * £83,333 * The current top rate of interest for an easy-access account is 0.6% – Moneyfacts, December 2020 11 10 B u i l d a f o u n d a t i o n S e c u r e y o u r f u t u r e R e t i r e i n s t y l e Read this now if you’re aiming to: Your pension is one of the best ways to save for retirement – particularly because you get Income Tax relief on the money you put into your pension pot (up to 100% of your earnings, capped at £40,000 this tax year). That’s why you should consider paying in as much as you think you can afford on a regular basis. It’s also worth thinking about topping up as much as you can before the end of this tax year (5 April), as it’s possible the government might change the tax allowances available to you in the future. Amazingly, 77% of people don’t know how much they’ll need in retirement. * So here’s an idea of what various levels of income will pay for. These figures assume you would have entitlement to the full State Pension, which is currently £9,110.40 per year. Therefore, the pension fund required shows how much you would need to have additionally in your own pension pot to achieve that overall level of income. Saving for a happy retirement The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances. How tax relief on pension contributions works How much do I need to save for retirement? Minimum Moderate Comfortable * Source: Pensions and Lifetime Savings Association, Retirement Living Standards, December 2020. These figures are based on a single person living alone. ** The fund size required is based on an annuity of £5,000 per £100,000, and assuming entitlement to the full State Pension of £9,110.40/year. Pension fund required to cover income shortfall: Pension fund required to cover income shortfall: Pension fund required to cover income shortfall: £21,792 ** £221,792 ** £477,792 ** What could I do? This covers most basic needs, plus some social occasions. However, it might be hard to afford to run a car. What could I do? This will give you more financial security, and the opportunity to enjoy a few luxuries such as an annual holiday in Europe. What could I do? This will give you more financial freedom and flexibility, and the opportunity to enjoy several holidays a year and eat out every few weeks. Pensions To find out more, go to: www.retirementlivingstandards.org.uk. When paying into your pension, you receive tax relief on any contributions. This is at the highest rate of Income Tax that you pay. So, to make a total contribution of (for example) £100: Basic rate taxpayer Higher rate taxpayer Additional rate taxpayer You pay £80 You pay £60 You pay £55 13 12 Money paid Tax relief State Pension Shortfall Please note that anything over the basic rate of tax must be claimed via your tax return. Income required: £10,200/year * Income required: £20,200/year * Income required: £33,000/year * B u i l d a f o u n d a t i o n S e c u r e y o u r f u t u r e R e t i r e i n s t y l e Read this now if you’re aiming to: The headline rates of Income Tax are 20%, 40% and 45%, but a quirk in the rules means someone earning more than £100,000 a year could pay even more. That’s because once your income exceeds £100,000, your tax-free Personal Allowance (£12,500 for most people) actually begins to reduce by £1 for every extra £2 you earn – so once your income hits £125,000, you have no Personal Allowance left at all. This means any income between £100,000 and £125,000 could result in an effective tax rate of 60%. If your income is within this higher range, you could consider making bigger pension contributions to bring it back under the £100,000 mark. For those with children, there’s another consideration. If your income exceeds £50,000, your Child Benefit payments are reduced by 1% for every extra £100 you earn (so once your income reaches £60,000, you’ll receive no Child Benefit at all). Making bigger pension contributions to bring your income back below £50,000 will preserve the benefit for you. Steer clear of the ‘60% tax trap’ Now consider this... The long-term effects of compounding mean that the earlier you start to make monthly pension contributions, the more you stand to benefit in retirement. Let’s say you’re planning to retire at age 67, and you make a gross contribution to your pension pot of initially £200 per month, the diagram to the right shows your estimated retirement fund based on if you first started contributing at age 20, 30 or 40. Paying more into your pension pot now can not only improve your current tax position, but can also really help give you the retirement you want, such as more luxuries or the chance to retire earlier. Contact your St. James’s Place Partner for more advice on how you can make the most of your pension tax allowances before the end of this tax year on 5 April. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances. Your next step now Remember Your pension allowances for 2020/21 Each tax year you can put the equivalent of your annual income, or £40,000, whichever is lower, into your pension and claim tax relief. This is called your annual allowance. That means a higher rate taxpayer would only actually pay £32,000 (and could potentially claim back another £8,000 via their tax return, making the effective cost £24,000). You can ‘carry forward’ your annual allowance if you haven’t used it fully in previous years – so use this year’s allowance first, then you can go back up to three tax years and take advantage of any unused allowance. If you’re 55 or over, you can withdraw up to 25% of your pension pot tax-free. The rest is charged at the usual rates of Income Tax. Your lifetime allowance (a limit on the total amount you can build up in pension benefits over your lifetime while still enjoying the full tax benefits) is £1,073,100. These figures are based on monthly contributions, increasing by 2.5% a year, with growth after charges of 2.4% per year. The figure is an example only and not guaranteed. All monetary values shown have not been adjusted for future inflation. It is not a minimum or maximum amount. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this. Pensions A maximum contribution of £2,880 a year per child is topped up to £3,600 thanks to tax relief. You can save into a pension on behalf of your children. 15 14 Age you start saving into a pension Estimated retirement fund 40 £123,000 30 £215,000 20 £349,000 The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Don’t forget your dividend allowance Dividends If you own stocks and shares, you’ll usually receive payments from them in the form of dividends. The first £2,000 of this is tax-free, but after that you’ll have to pay tax at varying rates according to how much you’re paid. But there’s an easy way to avoid this for some, and that’s by owning the shares through a tax-efficient ‘wrapper’, such as an ISA or a pension. (See pages 6 and 12 to find out more – and why it’s worth taking advantage of this year’s tax allowances before 5 April.) However, sometimes that might not be possible. If that’s the case, after the first £2,000 you receive, you’ll pay 7.5% if you’re a basic rate taxpayer for Income Tax, 32.5% if you’re a higher rate taxpayer, and 38.1% if you’re an additional rate taxpayer. Directors of limited companies also tend to pay themselves in dividends, rather than a salary, in order to make the most of the lower rates of taxation. Contact your St. James’s Place Partner for more advice on how you can avoid any CGT traps before the end of this tax year on 5 April. Contact your St. James’s Place Partner for more advice on how to do this – and making the most of your ISA and pension allowances – before the end of this tax year on 5 April. Capital Gains Tax (or CGT) is one of the most complex taxes to understand, so it’s no wonder that people fall into the trap of paying unnecessarily, or end up being penalised for not paying when they should. This is also made worse by the myth that only the very wealthy are likely to have to pay this tax. This could be anything from a second home to stocks and shares – or even valuable items such as jewellery or antiques, which is where people often fall foul of the tax. There’s a tax-free allowance of £12,300 for this year, then after that the rate is dependent on the level of Income Tax you pay – 10% for basic rate taxpayers and 20% for higher rate payers (and 18% and 28% respectively if you’re selling a property). However, you can claim some ‘allowable expenses’ to reduce your tax bill, such as for house repairs. You can also split your gains over two tax years and make use of tax-free transfers to your spouse – although this can be complicated so it’s worth seeking expert advice. It’s likely the government will increase CGT in the near future, to be more closely aligned with Income Tax rates – so it’s worth making the most of this year’s allowances and current rates if you can. Don’t fall into the CGT trap! Capital Gains Tax You could end up paying unnecessary CGT – or being penalised for not paying when you should. Your next step now If you own stocks and shares, it’s usually worth transferring them into an ISA or a pension, to avoid paying tax on the dividends. Your next step now There’s a strong chance the government might remove this tax advantage in the near future, so it’s worth thinking about how much you can afford to pay yourself in dividends before the end of this tax year on 5 April. You’re liable for CGT when you sell an asset at a profit. 17 16 S e c u r e y o u r f u t u r e R e t i r e i n s t y l e Read this now if you’re aiming to: S e c u r e y o u r f u t u r e R e t i r e i n s t y l e Read this now if you’re aiming to: 1. Use your gifting allowance before 5 April. Both you and your partner or spouse can each gift up to £3,000 a year and it will be deducted from your total estate. You can also carry forward this allowance for one year, if you haven’t used it already. So that means, if you haven’t used last year’s allowance, as a couple you can give up to £12,000 which won’t be counted as part of your estate for tax purposes. 2. Pay into a Junior ISA or pension for your children or grandchildren. Up to £9,000 can be invested into a Junior ISA per child this tax year. You can also set up a pension; and a maximum contribution of £2,880 a year is topped up to £3,600 thanks to tax relief. 3. Don’t forget to make a Will * – or if you already have one, ensure you review it regularly. This can also help you avoid falling into Inheritance Tax traps by, for example, setting up trusts for your beneficiaries. *Will writing involves referral to a service that is separate and distinct to those offered by St. James’s Place and is not regulated by the Financial Conduct Authority. The amount the UK government received in Inheritance Tax in the tax year 2019/20 (source: HMRC) Unfortunately, too many families are still getting a tax shock when their parents or grandparents die, as the government received a whopping £5.2 billion in Inheritance Tax in the last tax year. Although the tax-free threshold of £325,000 per person may seem generous, the rate at which Inheritance Tax is paid on the rest of your estate – 40% – is not. Protecting your wealth when you die Inheritance Tax Three ways to reduce an Inheritance Tax bill Note that if your home is included in the estate, and you leave it to your children or grandchildren, it means the tax-free threshold will increase to £500,000 per person if your total estate is worth less than £2 million. Fortunately, there are several steps you can take to reduce your beneficiaries’ Inheritance Tax liabilities – so act before 5 April to take advantage of these. £5.2 billion The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances. Contact your St. James’s Place Partner for more advice on how you can make the most of your Inheritance Tax allowances before the end of this tax year on 5 April. If you’re starting to think about protecting your family wealth, or want to continue to do so, giving money to your children or grandchildren now can be an effective way to shield it from Inheritance Tax. Your next step now Your Inheritance Tax allowances for 2020/21 If you leave all your estate to your spouse or civil partner, there is no tax to pay. The first £325,000 of your estate that you leave to anyone else is also tax-free. When your partner dies, your allowances can be combined – meaning up to £650,000 can be passed on tax-free. If your home is included in your estate, and you pass it on to your children or grandchildren, the tax-free threshold increases to £500,000 per person, as long as the estate is worth less than £2 million in total. You and your spouse or partner can each gift up to £3,000 per year, which will be deducted from the value of your estate. This £3,000 allowance can be carried forward from last year if unused, meaning a couple could potentially remove £12,000 from their joint estate this tax year. 19 18 How Inheritance Tax works Brian and Beryl die within a few years of each other and leave their entire estate to their children. This has a total value of £1 million, which equates to an Inheritance Tax bill of £140,000 First £650,000 tax-free £350,000 taxed at 40% Read this now if you’re aiming to: P a s s o n w e a l t h Your tax year-end checklist ISAs Are you making the most of this year’s £20,000 ISA allowance? And the £9,000 Junior ISA allowance? Personal Savings Allowance Have you got the right balance between an emergency cash fund and making the most of this year’s ISA allowance? Your cash interest is probably all tax-free. Pensions Are you getting the most of the tax- efficient benefits your pension can bring? There’s a chance the government might reduce some of these soon, so make sure you’re taking advantage before the end of this tax year on 5 April. Capital Gains Tax Are you sure you won’t get caught in the CGT trap? Make sure you’re paying what you owe, but not paying when you don’t need to. Dividends Are you getting your dividends tax-free, in an ISA or pension? Or, if you’re a business director, are you thinking about how you might shield yourself from future tax rises? Inheritance Tax Are you thinking about reducing the Inheritance Tax your family might have to pay when you die? You can gift them up to £3,000 before 5 April and it will reduce the taxable value of your estate. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives. Members of the St. James’s Place Partnership in the UK represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority. St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom. Registered in England Number 4113955. SJP2270 V15 (01/21) The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. Equities do not provide the security of capital characteristic of a deposit with a bank, building society or Cash ISA. The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. Act now to make sure you’ve thought about all the steps you can take to reduce your tax bill and make your money work harder for you. Contact your St. James’s Place Partner for expert guidance on how to make the most of all of your allowances before the end of this tax year, 5 April.