Published: 11 February 2019
An estimated £4.6bn was paid in unnecessary tax in 2016, according to the most recent Tax Action research by Unbiased and Prudential1.
They found that millions of people paid more tax than they needed to because they overlooked simple financial planning measures and failed to take advantage of tax-saving opportunities.
In Nine ways to save tax we identify some of the main allowances and tax reliefs available. And here we take a closer look at three areas of particular interest for savers and investors, highlighting practical points you may find helpful when claiming or using what you’re eligible for.
There are several reliefs and allowances potentially relevant to your pension contributions. You’ll find details in our guide to Getting the most from your pension savings.
The main one is tax relief. This is given automatically on pension contributions for basic rate taxpayers. But if you’re a higher rate (40%) and additional (45%) rate tax payer and want to benefit from any relief you’re entitled to at these rates, it has to be reclaimed through HMRC. This can be done by completing a self-assessment form, and if you haven’t already registered for this you can do so online at gov.uk.
There are income tax differences between Scotland and the rest of the UK, however these don’t affect your entitlement to tax relief. If you’re in Scotland and pay the 19% starter rate of tax, your pension provider will claim tax relief for you at a rate of 20% as for contributions covered by basic rate tax. Above the basic rate, taxpayers in Scotland - including those paying the 21% intermediate rate - have to reclaim any further relief through HMRC, as for elsewhere in the UK.
There are upper limits to be aware of for everyone, as contributions above the Annual Allowance aren’t eligible for tax relief. The Annual Allowance is £40,000 for most people who haven’t already started taking a pension income, reducing for high earners by £1 for every £2 of income above £150,000. If you’ve already started taking a pension income the Money Purchase Annual Allowance applies to you instead and this is £4,000.
There’s also a Lifetime Allowance for how much you can build up in pension schemes without paying a tax charge when the time comes to take it out. This is currently set at £1,030,000, going up to £1,055,000 from 6 April 2019 2.
It’s worth checking how you are doing against your Lifetime Allowance from time to time, especially if you’ve ever been a member of a Defined Benefit pension scheme. The benefits from these schemes can be worth more than you think, and the scheme provider should be able to tell you their value for the Lifetime Allowance in your case.
You can save or invest up to £20,000 through an ISA for the 2018/19 tax year, sheltering any future growth or income on this money from income and Capital Gains Tax. The allowance for 2019/20 will also be £20,000.
Your annual ISA allowance can be spread across the different forms of adult ISAs, of which there are four: Cash ISA, Stocks & Shares ISA (the type offered by Alliance Trust Savings), Innovative Finance ISA and Lifetime ISA. A Junior ISA is also available if you are saving for a child. There’s a separate annual allowance for this of £4,260 for the 2018/19 tax year. The allowance for this in 2019/20 will be £4,368.
Cash ISAs and Stocks & Shares ISAs are the most commonly held adult ISA types, according to government statistics 3. The other two are more specialised.
The tax benefits of all ISAs are automatic, but the annual allowance has to be used by the end of the tax year (5 April) as unused amounts can’t be carried over.
Capital Gains Tax (CGT) - CGT is taxed at 10% (within the basic rate band) and 20% (above the basic rate) on profits made from the disposal, sale, gift or exchange of assets. Or 18% or 28% respectively on profits from residential property. The tax kicks in on profits above the annual allowance (currently £11,700 and going up to £12,000 from 6 April 2019).
Several assets are entirely exempt, including ISAs, cash, prizes (including premium bonds), gifts of UK registered securities and private motor cars, including vintage cars. Gains from selling your own home are also exempt, provided you lived there throughout the period of ownership.
As with ISAs, you can’t carry unused allowances to the following tax year. However, if you have investments in a General Investment Account (that is, outside of an ISA or pension) you could consider selling some of them to reduce any total gains you’re sitting on. If you don’t need the proceeds at the time you could then buy investments with them again. This is often referred to as a ‘bed and breakfast’ transaction.
There is a ‘real time’ CGT service at gov.uk that UK residents can use to report gains that might be taxable to HMRC (you can register for credentials if you don’t already have them). Alternatively you can do it annually through self-assessment. You might also want to claim for losses to help reduce your taxable gains - so it’s worth keeping the paperwork for any transaction which may be relevant for CGT, whether you make a profit or not.
CGT is one of the more complex taxes, and exact details on aspects such as calculating gains, asset eligibility and the treatment of part sales should always be checked at gov.uk as tax rules can change over time.
The benefit you can gain from tax allowances and reliefs will always depend on your personal circumstances. Also laws and tax rules can change over time, as thresholds move, restrictions are added or removed, and tax bands rise and fall. This article reflects our understanding at January 2019.
To make sure you’ve got the most up-to-date information, check the tax pages at gov.uk. And if you are not sure how tax might affect you and any financial decisions you plan to make you should seek professional advice.
This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.
Laws and tax rules may change in the future without notice.
Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.
1 unbiasedpro, UK consumers set to waste £4.6 billion in unnecessary tax savings, 20 January 2016
2 The Money Advice Service, Tax relief on pension contributions
3 HMRC, ISA Statistics, August 2018
Alliance Trust Savings Limited is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings Limited gives no financial or investment advice. ‘Alliance Trust Savings’, ‘ATS’ and 'AT Savings' are all brand names of Alliance Trust Savings Limited together with the ‘Alliance Trust Savings’ logo are owned by and used with the permission of Alliance Trust PLC, the previous owner of Alliance Trust Savings Limited.