End of tax year checklist
The end of the tax year is nigh and for many the April 6th date is use it or lose it when it comes to savings, tax and pensions.
How can you make the most of your tax-free allowance, and what should you be doing this week? There is still time to act, but you will have to be fast.
Sarah Routledge rounds up some tax experts to find out.
Happy Birthday ISA
It is ten years since the Individual Savings Account, better known as ISA, was launched. Gordon Brown announced the tax-free product in his first Budget as chancellor in 1997, and the first ISA was introduced two years later in 1999.
ISAs allow savers to keep cash, as well as assets like stocks and shares, in a tax-free 'wrapper' and up to £7,200 can be invested every year, with up to £3,600 of the full amount in cash.
ISAs are popular, with UK consumers saving £220.5 billion through the accounts as of the end of the last tax year, although according to Halifax less than a quarter (23 per cent) of savers have used their ISA allowance in the 2008/09 tax year.
Alison Tattersall, head of customer and proposition at Barclays Financial Planning, says: "I think we're seeing a 'batten-down-the-hatches' mentality - reduce debt, don't spend, and then maybe consider saving.
"We would always recommend that debts should be repaid in the first instance, but utilising an ISA can also be a key strategy in securing your financial future.
"And what's underappreciated is that in a low-inflation environment, possibly even a deflationary one, an ISA is actually capable of delivering real benefits that we wouldn't see in a high-inflation economy."
Although consumers are well-advised to pay down their debts while interest rates are so low, there is also an argument to keep some emergency spare cash in an instant access account, which could be kept in an ISA.
Interest rates have fallen dramatically, leaving many savers feeling there is not much point in taking an interest in accounts. But as we come to the end of the annual ISA season, competition has kicked in and there are several offers around that are significantly above the Bank of England base rate.
Colin Kersley, M&S Money chief executive, says: "Although interest rates are at a historic low, good offers are still available in the competitive savings market.
"Safety is also a priority in these uncertain times, which is why M&S Money is attracting large numbers of savers applying for new Cash ISA accounts or transferring from other providers."
Several high street banks - including Barclays, Abbey and Alliance and Leicester - are offering ISAs with an interest rate of over 3.5 per cent, which is impressive considering the Bank of England base rate is currently 0.5 per cent.
These also compare well to other notice savings accounts, which are not tax-free.
Pension contributions
Each year, UK residents under the age of 75 can pay in pension contributions equal to 100 per cent of earnings, subject to a maximum of £235,000, or £3,600 for non-earners. If this allowance is not used for any tax year then it is lost.
If you are within a year of retiring there is no maximum to the amount you can put in, although if your pension fund exceeds the current lifetime allowance of £1.65 million.
Rachel Vahey, head of pensions development at Aegon, says: "Although people's finances are stretched just now they should consider making the most of these tax advantages to boost their pension saving."
The end of this tax year is a particularly important time to review your pension as there are some important changes happening, says Ms Vahey.
"The deadline for applying for protection against exceeding the lifetime allowance is April 5th," she says.
"People with large pension pots can avoid additional tax charges by applying for either enhanced or primary protection. Primary protection is available for people with funds worth more than £1.5 million as of April 2006."
This helps protect those with a large pension from paying additional tax on future fund growth, Ms Vahey explains.
"The other change is that the cost of buying back missed National Insurance contributions will rise on April 6th so people with missing years might want to buy them now," she adds.
This could be very important to those who have taken time off work - particularly women who have given up work to care for children - and want to benefit from a state pension.
Women with less than ten qualifying years of national insurance are entitled to no basic state pension, but as soon as they reach ten they are entitled to a pension of 26 per cent of the full basic state pension (BSP). This year, the full BSP is £90.70 a week, meaning that 10 qualifying years would be needed to get a pension of £23.58 a week.
According to calculations from Standard Life, if a woman only has nine qualifying years, the cost of buying Class 3 NI contributions to get an extra year (and qualify for 26 per cent of the full BSP) is only £421.20 or £8.10 a week.
Yet, to buy an index-linked pension of £23.58 a week (or £1,226.16 a year) on the open market would cost £35,240 (for a 60-year-old woman, single life).
But the cost of buying back years will go up after April 6th, so anyone who wants to top up their state pension at current prices should act fast.
Ms Vahey also advises workers to find out about their workplace pension.
"While not really an end of tax year issue people should make sure they are taking advantage of any pension offered by their employer. An estimated 4.7 million people don't currently take up the offer of joining their employers' pension scheme and are effectively giving away free money."
Tax
Two of the important considerations for annual tax allowances are inheritance tax (IHT) and capital gains tax (CGT).
"The IHT consideration is the fact that each individual has £3,000 each year to give away. If this is not used one year, it can be carried over to the next, but after that it's lost," says Graham Barber, head of financial planning at Rensburg Sheppards.
"Capital gains tax is making sure you use the full allowance this year," adds Mr Barber.
Taxpayers are allowed £9,600 in profit from their investments before they have to pay any tax.
However, this year investors may be seeing their investment making a loss rather than a gain.
"But if you do have some taxable gains, and they also had some losses, these losses can be offset against the gains," Mr Barber added.
As long as you are paying your taxes, make sure you are not paying too much. According to independent financial adviser search site Unbiased.co.uk, Brits will have spent £10 billion unnecessarily on taxes over this year alone.
David Elms, chief executive of Unbiased.co.uk, said: "With individuals and families forced to tighten their belts this year, it is alarming how little people are doing to take advantage of the tax incentives, reliefs and credits available to them, and to avoid being hit by fines for basic mistakes.
"We estimate that each UK taxpayer will waste an average of over £191 in tax payments this year, although this sum varies greatly based on lifestage and financial circumstances."
If you suspect you could be wasting cash on not making the most of tax allowances, Unbiased.co.uk has a useful tax calculator that can help you work out if there are any savings to be made.
"Tax can seem a complex issue and especially in the current environment many are nervous about making the wrong financial decisions," Mr Elms adds.
"An independent financial adviser can assess your entire financial position and ensure you are being as tax efficient as possible."
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