21st March 2016
With the end of the 2015/16 tax year a fortnight away and the added hurdle of the Easter Bank Holiday weekend being early this year, Jason Hollands, managing director at Tilney Bestinvest offers practical tips on how investors can successfully beat the end of tax year deadline…
Don’t deliberate any longer – just dash for cash
ISAs are a “use it or lose” it annual allowance, enabling you to save or invest up to £15,240 before 6 April this year in a tax free environment. But many people wait until the final days as they deliberate over what to invest in, or whether they should even invest at all as they weigh up the latest gloomy headlines.
Hastily made ad hoc investment decisions may not end up being the right ones and ideally it really does make sense to review your existing portfolio before deciding where to invest any new cash.
Yet when it comes to utilising valuable long-term tax allowances such as ISAs and pensions, the immediate decision isn’t where to invest or if it is a good time to invest at all. All you should worry about is simply securing the allowance in the first place and that doesn’t matter whether you are bullish or bearish on the markets. The important thing is to fund your ISA or pension with cash. You can then come back later and decide where to invest it when you are more confident in your plan.
Even if you know where you wish to invest, initially funding your ISA or pension with a cash injection can make sense, as it leaves you free to drip feed your money into the markets over a period of time, which can help reduce the ups and downs of daily market volatility.
Prepare ahead – even when investing online
Opening an ISA online can take just take five minutes – providing you have all the information you need to hand and have prepared ahead. But remember you need to compete the process, not start it by midnight on 5 April.
Importantly, when investing in tax wrappers such as ISAs or pensions, you will need to provide your National Insurance number, so you really do not want to be scrabbling around trying to find that late at night on the 5 April. If you can’t remember it you can either find it on correspondence from HMRC or get it from your company payroll department.
Another important point of preparation is to make sure you have sufficient cleared funds in your bank account to make the payment. You cannot use a credit card to fund an ISA or pension and the payment must come from a UK bank or building society account (or joint account) of the person applying. The last thing you want to find when you are racing to secure your allowance is that your bank blocks the payment for security reasons – so you may want to contact them ahead of making a large transfer.
Be aware that a friend or family member cannot directly pay for your ISA, pension or Venture Capital Trust (VCT), whether online or by writing a cheque, so locating a cheque book that you may not have used for a long time is another item to put on your preparation list.
It can also be the case that the cut off point for opening a SIPP is earlier than an ISA as there is an extra tier of administration required – so don’t assume everything online means you can invest right up to midnight.
When investing in schemes that have limited capacity, such as VCTs, it is vital to check whether it is still open or very close to reaching its target before posting off your application as these can fill up rapidly at this time of year. By the time your cheque and application for an investment that has closed is returned, you may have missed the boat altogether on alternatives. We regularly update the amount of funds raised for each VCT offer versus their targets on our website at www.bestinvest.co.uk/vct
Beware of postal pitfalls
While many people now invest online, others still prefer to put pen to paper or may not have online investing as an option when subscribing for certain types of investments such VCTs or Enterprise Investment Schemes.
Unfortunately the postal service will never be 100% reliable and so investing this way in the final days of the tax year carries the risk of missing the deadline because of delays – especially this year when the Easter bank holidays are so close to the tax year deadline.
However, you can reduce this risk by not using reply-paid envelopes, which often take longer than stamped post and you should also avoid sending applications by second class postage which could prove a false economy. Instead, it might make sense to visit your Post Office and arrange for your application to be sent via the Royal Mail Special Delivery service which guarantees arrival the next day for a modest cost.
No cash to invest? Then “Bed & ISA” or “Bed & SIPP”
If you don’t have fresh cash to invest but do have other existing investments such as shares or funds held outside of ISAs and pensions, then consider using these to fund your tax efficient allowances. This is a process known as “Bed & ISA” or “Bed & SIPP” which can help you migrate your investments into a more tax efficient environment for the longer term. When doing this, you should take care to crystallise profits within your annual tax free capital gains allowance (£11,100). You can then repurchase the same investment within an ISA or SIPP if you wish or choose to invest elsewhere.
Be canny about capital gains
Even if you plan to fund your ISAs and pensions with cash, it can still make sense to crystallise profits on investments held outside of tax efficient accounts to utilise your annual capital gains allowance. This is one or the most overlooked allowances but by periodically using it, you can prevent large tax liabilities building up over time. If you sell an investment to utilise your allowance you can either use the proceeds to purchase a different investment straight away or reinvest in the same investment providing you wait at least 30 days.
High earners: focus on maxing out your pension
Those earning over £150,000 a year (including company pension contributions) have special reasons to prioritise pensions over other allowances over the remaining days of this tax year, as from the new tax year they will have their annual pensions allowances “tapered” down from the £40,000 per annum allowance currently available. For anyone with total earnings of £210,000 or higher, their pension contribution allowance will dwindle to a bite sized £10,000.
In the current tax year, contributing to a pension is highly attractive for high earners who are subject to the 45% income tax rate, since they can benefit considerable tax relief. For these investors, an £8,000 pension contribution is topped up by the State by £2,000 and then additionally, they can claim a further £2,500 off their income tax bill. That means a pension investment of £10,000 can be achieved for a net cost of £5,500 – but scope to make big contributions on this basis is about to be scaled back imminently.
Keep calm and carry forward
If an investor has fully used their pension allowance for this tax year but has the ability to invest more and still benefit from tax relief at the higher or additional rates, they may be able to mop up any unutilised allowances from the three previous tax years (starting with the earliest) through a process known as pensions carry forward – this can be very useful for any one whose earnings have risen over this period or who has started investing later in their life and needing to play catch up.
Don’t forget your spouse or partner
For those who have maximised their own pension allowances or cannot invest in them further because they will exceed the lifetime allowance, investing in a pension for their spouse or civil partner is an option worth considering. Even non-earners (including children) can have a pension of up to £3,600 a year and still receive a basic rate top up – meaning the costs of the contribution is just £2,880. Every little bit helps.
And finally, when an investor has successfully used all the allowances they wish to, it might make sense to either invest earlier in the new tax year to avoid history repeating itself the next year: Better still, consider setting up monthly investment programme that will put an end to much of the form filling and deliberating.