02 March, 2021
What the tax year end means for you
A tax year begins on April 6th and runs to April 5th the following year. This was established by the British Treasury in 1752 and has never changed. We’re sure there’s a reason for these dates, but let’s just accept it.
HMRC works out how much tax you have to pay based on the income and capital gains you receive during these dates. If you're self-employed, you'll know all about this from doing your self assessment.
What has tax got to do with savings? ISAs and personal pensions are two ways to save that guarantee you won't pay tax on your savings - ever. Plus, some of them even offer tax relief in the form of a bonus on your savings.
At the end of the tax year, various allowances will run out, such as the amount you can pay into a Lifetime ISA.
Date for your diary: 5th April 2021
The tax year ends at midnight on the 5th April each year.
That's when you need to have opened any accounts you want to open, and deposit any savings you want to count towards your current ISA allowance.
It can take a few days to open a new ISA, and some providers require a few days to transfer the money over. Don’t leave it too late!
Here are the timings for opening ISAs through the Multiply app:
Unity Mutual Lifetime ISA: open the account and deposit funds by 3pm on Monday 5th April.
Multiply Stocks & Shares ISA: open the account and deposit funds by 3pm on Thursday 1st April.
What does it means for ISAs?
The government gives you an annual allowance for how much you can save tax-free. The overall amount for ISAs is £20,000 per individual and you’re allowed to split this via the different types of ISAs available. You’re allowed to pay into each ISA type every tax year:
- Cash ISA: Low risk - best used for short-term saving goals or for those who are unwilling to accept any market risk with their money.
- Stocks and Shares ISA: Can be higher risk and is typically used for longer term goals and for those willing to accept a level of risk with their money.
- Lifetime ISA (LISA): Can be Cash or Stocks and Shares. Benefits from a 25% government bonus but can only be used towards a deposit for a home or for later in life (60 onwards) without losing the bonus.
- Innovative Finance ISA: High Risk - Invests via Peer to Peer lending.
Another limit to keep in mind: the LISA allowance is £4,000 a year, although it’s included in your overall £20,000.
If you use this £4,000, you can still use the remaining £16,000 across the other three ISA types. You can split your annual allowance however you like across the different ISA types, such as putting £4,000 in a LISA, £10,000 in a Cash ISA and £6,000 in a Stocks and Shares ISA.
Your ISA allowance runs in line with the tax year, so you don’t have long to utilise your available allowance in the current tax year.
If you can, it could be worthwhile to add to your ISA, especially if you’re looking to utilise your LISA allowance and benefit from the 25% government bonus.
Make the most of your allowance
How should you use your ISA allowance? It depends on your current position and what your goals are.
If you have any high interest debt, you may be better paying this off first. We would recommend downloading the Multiply app so you could receive advice around this.
As advisers, we wouldn’t recommend investing money when you don’t need to. If your only goal is to make use of the available allowances, your best bet for now is a cash ISA. You will still have the option of transferring to a Lifetime or Stocks & Shares ISA later on if your goals change.
First-time buyer accounts
If you’re a first-time buyer, a LISA is generally going to be your first choice for saving for the deposit because of the annual £1,000 bonus.
Unity Mutual’s Lifetime ISA could be the right fit for you. It offers a market-leading guaranteed 1.5% interest rate and if you apply via Multiply, you will also benefit from a £50 welcome bonus (£62.50 with the government bonus). Find out more here.
You can’t have more than one active LISA in any one tax year. So, if you have already paid into a Lifetime ISA since 6th April 2020, you should continue to utilise your existing LISA. You can start a different one next tax year and even transfer LISAs from one provider to another.
Most people don’t use their full ISA allowance every year. But something is always better than nothing. Any money you add to and keep in an ISA will be tax-free - and there’s always next year.
If you can only afford £500, put in £500. It'll be tax-free forever and it's good to put aside whatever you can. Each year, you have the same opportunity to maximise your ISA allowance.
Got kids? The Junior ISA allowance is £9,000 a year for children and resets at the end of the tax year like all other ISAs.
Personal pension contribution allowances are also set by the tax year, although there’s no actual limit to how much you can put into a pension. However, if you’d like a bit of tax relief to help your retirement planning along the way, then you can only get tax relief on the lower of your income or £40,000 per tax year each year. This is called your Pension Annual Allowance (PAA).
This includes contributions from you, your employer and the government’s tax relief being added to all contributions.
Similar to the ISA, this allowance resets on the 6th April and you can start contributing again. Your pension will stay tax-free for as long as it stays in your account. From age 55 onwards you can take out up to 25% tax-free with the balance being taxed as income. Clever planning can optimise both your contributions going in and the withdrawal of income in your retirement years.
If you have any questions about tax year end payment, please get in touch via firstname.lastname@example.org