Investing your money wisely plays an incredibly important part in your ability to achieve the things in life that matter most to you. By utilising the generous allowances of an ISA or maximising the fantastic tax benefits through pension contributions, you can ensure you’re on track to securing your financial goals.
Many people however, don’t make the most of the allowances they’re entitled to – meaning they could be missing out on valuable savings. With tax year-end just around the corner, make sure you understand the allowances you’re entitled to so that you can ensure your investments are working harder and smarter in securing your future.
An ISA is an Individual Savings Account offering tax-free investment payments – an incredibly powerful way of saving to enable financial freedom and peace of mind. In fact, an ISA is a cornerstone in allowing you to take complete control and live life on your own terms.
When setting up an ISA, you have an annual allowance running from the tax year 6th April – 5th April, whereby you can deposit a certain amount of money into your account over this 12 month period and any money accumulated will be free from income or capital gains tax.
Your annual ISA allowance is £20,000 and this can either be used in one type of account or you can choose to spread it across several different types of ISAs. You could, for example, put £6,000 into a cash ISA and £14,000 into a stocks and shares ISA.
However, if returns on your Cash ISA savings aren’t keeping up with inflation, then your spending power is reducing. When using a stocks and shares ISA you can invest in a portfolio of funds, rather than individual shares. This spreads your money far more widely, offering the benefits of diversification and professional management. By investing in assets capable of generating income and capital growth, a stocks and shares ISA gives you the chance to make the most of the long-term tax benefits of your annual ISA allowance.
It’s good to remember that lifetime ISAs work differently. Although they are also not subject to income or capital gains tax, the government offer a bonus of 25% of the money contributed, meaning that the annual allowance is much lower – currently sitting at £4,000 each tax year.
Your ISA allowance operates on a use-it-or-lose it basis, so if you don’t use the £20,000 or £4,000 before the end of the tax year, unfortunately it’s gone for good. This means you could be losing out on valuable tax-efficient savings opportunities which allow your money to go further towards your future.
Make sure you don’t miss out on this tax year and utilise your annual allowance before April 5th. If you’d like to know more about ISAs, read more here.
Please note that St. James’s Place do not offer a Lifetime ISA.
You can pay as much or as little as you wish into your pension. There is however, an annual allowance – you can only pay a maximum of £40,000 per tax year which is eligible for relief. If you’re a high earner, it may be less, depending on how much you earn.
With all personal pension contributions, you get an automatic top-up for basic rate tax relief. That money is paid directly into your plan by your pension provider. So, if you’re a basic rate taxpayer and have £4,000 to invest in your pension as a lump sum, you’ll get £1,000 in tax relief on day one. That’s a very quick boost on your initial contribution. If you’re a higher or additional rate taxpayer, you can currently claim extra tax relief via your annual tax return.
As pensions tax relief on personal contributions is automatically paid at 20%, if you are a higher or additional rate taxpayer, you are able to claim the additional 20% or 25% in your Self-Assessment tax return. The further tax relief is paid to you as a cash sum upon completion of your tax return. So, by paying more into a pension, you will pay less tax, meaning you will have even more to put towards your retirement.
If you have fully used your annual pension allowance, you may be able to carry over any annual allowances that you didn’t use from the previous three tax years. You can find out more about this on the gov.uk website.
It’s important to remember that if you exceed the pension lifetime allowance (currently set at £1,073,100), you’ll be subject to tax on your contributions. The pension lifetime allowance is for all your pensions combined so if you have more than one, you’ll need to add up how much you have in each to get a grand total. You can speak with your pension provider to find out how much of your lifetime allowance you’ve used. Please head to the gov.uk website to find out more about the pension lifetime allowance.
Always try remember, the longer your money is invested, the more potential it has to grow – thanks to the power of compounding. Whilst the idea behind a pension is simple, sometimes making the right choices can be incredibly complicated.
Whether you have a question about the ISA lifetime allowance, your pension allowance or you would simply like advice about saving for your future, maximise your savings potential and get in touch with our expert advisers today.
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.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.