The end of the tax year - checklist for investors

As we are fast approaching the end of the current tax year (5.4.17), there is still a bit of time to check and make sure you have ticked all the boxes to maximise your benefits. As always, not everyone of the tax efficient investment ideas may be relevant to you but make sure you do all the ones that are. Lets get started:

1.ISA

This one really is a no-brainer for almost everybody. This years' allowance per adult person is $15,240 and can be put either into a cash ISA or Stocks&Shares(S&S) ISA or a combination of both. As flexibility has increased such that you can now move from one to the other and back if needed, this should make the decision to do one easier. If you have long term funds available, the S&S ISA should be your choice, filled with quality investments that will likely increase your capital over time.

Please remember that the ISA itself is only a wrapper - just like a paper bag- which you can then fill with investments (or cash).

If you are unsure if you need the money back for other purposes within the next five to ten years, you may want to opt to fill you ISA with cash.

Next year, there will be even more options available and the limit will increase to £20,000, but we will talk about that after the 6.April 2017.

Don't forget, however, that children now also have an ISA allowance of £4,000 in a junior ISA, with the same benefits as above. A great way to set the children up for a good start when they turn 18.

2. Pensions

This is a big one, as access to your pension has been made much more flexible over recent years and there are still massive benefits to be had.

They also still provide tax relief at your marginal rate or, even if you are a non-tax payer, you still qualify for 20% tax relief. This is particularly interesting to investors aged 55 or above, who could "retire" and hence, access their money immediately.

If you are a higher rate tax payer and you have not yet reached/exceeded you lifetime limit, using your pension allowance (max. £40,000) is a no-brainer, as you will obtain 40% tax relief. If you have not already done so, you can also use your allowances 3 years back (you have to use this year's allowance first, though). This is particularly important this year, as it is your last chance to use the higher allowance of £50,000 for the tax year 2013/14.

But even as a non-tax payer it makes perfect sense to use your allowance. Here, I will give you a "real life" example:

Lets assume you are age 55 or older and you have no relevant income. (it still works if you have a small income of up to £8500!)Therefore, you are not liable to income tax, as income tax only starts at £11,000.

However, you are still eligible to receive the 20% tax relief on pension contributions, but only up to a maximum of £3,600.

In this case, you open a SIPP account. In this example and for illustration purposes I am using Selftrade.co.uk (subsidiary of Equity), but other providers, such as iii.co.uk also offer low cost SIPPs.

You subsequently fund your account with a maximum of £2,880. (This represents 80% of the maximum contribution of £3,600.

The trustees of your SIPP will then claim the remaining £720 from HMRC to bring your account total to £3,600.

The cost for opening a Selftrade SIPP is £99+VAT, a total of £118.80.

In reality, your account will look like this: £2,880 (your contribution) minus £118.80 (cost SIPP) = £2761.20.

After a few weeks, you will receive the £720 from HMRC in your account.

If you the "vest" your pension, i.e. start taking your money out in what is called a flexible draw down, you will be able to receive 25% of your pot tax free.

The annual cost for flexi drawdown with a self trade SIPP is £150 +Vat, so £180 total. This will also be deducted from you pot (unless you arrange to settle the fees separately).

The total in your pot now looks like this:

£2,761.20 + £720 - £180 = £3,301.20

The tax free portion of this pot (25%) equals £825.30, which you can receive straight away.

This leaves £2,475.90 in your account.

You could leave this money in there to grow or to take at a later point, either as one lump sum (although it is not as straight forward as you may think) or, as suggested here, take 12 monthly payments of £ 206.32

This will ensure that

a.) you stay below the HMRC tax threshold of £11,000 of income for the year and so no tax is payable on it.

b.) you take all your pension money out during the course of one year, and hence do not incur another £150 annual flexi draw down fee.

So, how does it all stack u in total, then:

You pay: £2,880

You receive: £825.30 tax free lump sum

You receive: £2,475.90 tax free in the form of regular monthly income of £206.32

You receive total: £3,301.2 after all cost

This represents a NET return on your money of 14.625% or £421.20

While I understand that not everybody is in a position such as given in the above example, I have come across a lot of investors (and couples) who fit the bill, but have never thought about it.

If you want to make use of it, though, there is no time to lose now, as the tax year decline looms.

A final thought: The maximum contribution falls well within the gift allowance limit of £3,000 that anybody can gift to one person per tax year. Therefore, this makes for a great present for children and grandchildren, as you only pay in £2880 ( you could even settle the SIPP costs and still be below the allowance), but £3,600 are in the pot for your children/grandchildren.

VCT/EIS:

These schemes are targeted at the higher rate tax payer and can be a very efficient vehicle to save taxes while investing for the long term, but, by their very nature are more risky (you invest in young enterprises).

Although you have to be fast to get it set up for the current tax year if you in the position that you need to use the huge tax incentives, particularly as property tax advantages are being cut back, I will leave the details for another blog, as there is too much to consider and I want to keep the blogs at a reasonable length.

Needless to say that I strongly suggest you seek specialist advise in this area if you are not familiar yet with these type of investments.

As always, these are just my thoughts targeted at the serious, long term DIY investor and, if you have any doubts, you should seek professional advice.

None of this constitutes a solicitation to buy or act upon.