Use it or lose it

This is one of these warnings that I give people every year as we approach the end of another tax year. Time is running out for those of us who still have unused ISA allowances.

No matter how far in advance I warn people of the impending end of a tax year and the things that need to be done before it does end, so many savers and investors leave these things until the last minute.

For 2018/19 tax year, which ends on the 5th of April, at the end of this week, the ISA allowance is £20,000. The biggest benefit of an ISA is that you don’t have to pay tax on the gains you make from money that you put in it. This can be a big saving, especially for higher rate tax payers.

There are now people who have hundreds of thousands of pounds invested in ISAs because they have invested the maximum every year, and that can bring with it a substantial tax saving. If you have money sitting in an ordinary bank account then you should consider a switch before the end of the year.

Make sure that you are moving your money for the right reasons though. Don’t move from a bank account that is paying a high rate of interest to an ISA that is paying next to nothing. If you do then any tax savings will be lost because you could receive much less interest at the end of the year.

And remember that there are different types of ISAs out there. Cash ISAs act like your bank account and your money is safe whereas if you invest in a Stocks and Shares ISA then you could lose some of the money you invest if the market goes against you and your fund drops in value.

Some Stocks and Shares ISAs are riskier than others so you should make sure that you understand the levels of risk involved, especially if you think that you might need to withdraw some of your cash after only a short period of time.

The same is true of pensions. We all have an annual allowance, and this is the amount of money that we can pay into a pension in a tax year and claim tax relief on.

For most of us the allowance each year will be £40,000 although this could fall as low as £10,000 for anyone earning over £210,000 a year.

If you have a personal pension, or are a member of your employer’s money purchase scheme then the calculation is pretty straightforward and the allowance is simply the amount of money that you pay into your pension. For most pension schemes you can make payments either on a monthly basis or as a lump sum, or any combination of both. Many people will pay a regular amount every month and then make an additional payment at the end of the tax year if they have any spare money lying around.

Any money that gets paid into your personal pension will qualify for tax relief at your highest rate of tax, so it is a very tax efficient way to save. If you are a basic rate taxpayer and you invest £80 into your pension then the pension scheme will reclaim another £20 from HMRC. If you are a higher rate taxpayer then you can claim the higher rate relief from your tax return which means that in effect a contribution of £100 will only have cost you £60.

Any year end contributions will have to be with your sorted by the end of this week so you will need to act fast.

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