How to plan for the end of the tax year

Are you prepared for the new financial tax year? Trevor Clark, operations director at Rutherford Wilkinson, gives his tips on how to maximise your investments.

How to plan for the end of the tax year

Determining whether you have maximised your £15,240 ISA allowance is one of the first and most crucial factors to effectively tax plan, especially when approaching the new financial tax year. This allowance cannot be carried forward to the next year and this tax shelter offers protection from tax on interest, dividends and capital gains, especially important for those who pay a higher rate of tax.

While using as much of your ISA allowance as possible before the end of the tax year makes sense, bear in mind there is also an annual capital gains tax (CGT) exemption of £11,100. This should be maximised, potentially by cashing in investments before the end of the tax year to reduce your tax liability, especially considering the allowance cannot be carried forward to the next tax year. This could be achieved by selling a fund or unit trust, crystallising a gain exempt under the allowance, and reinvesting the initial investment and the gain in a similar investment with the same strategy.

Capital gains

CGT liability is calculated on the gains that you make, rather than the total received. For those that pay higher rate tax, this is 20%, while for basic rate taxpayers this is 10%. Generally it makes sense to invest for capital growth instead of income because the capital gains tax rates compare favourably to the rates of income tax which are applied to dividends above the £5,000 allowance. More on this later.

If you’re a married couple or civil partners, it usually makes sense to make use of both of your allowances, with both of you investing and using your capital gains exemptions. This could involve transferring growth assets where you have not taken a gain to your partner or income producing assets to the other to make use of both allowances. By increasing your pension contributions, you can push total income, of which your taxable gains are one part, into the basic rate tax band.

While realising investments before the end of the tax year to make full use of your capital gains allowance is one method to effectively mitigate your tax liability, if your gains from your investments are beyond the exemption you could potentially offset your losses against the gains to bring them down and make full use of the allowance. Here’s the tricky part, doing this without wasting any of the allowance since it cannot be carried forward. However, you can carry forward losses while using just those necessary to reduce your capital gains in the current year to the threshold. This could involve looking at your losses from previous tax years.

The introduction of allowances for savings and interest may have put ISA saving off your radar but these do not make using an ISA less important, as savings on tax when within this tax shelter are significant and often unwittingly the total income of an investor can push them into the higher tax rate bracket, reducing the allowances available. A method called ‘Bed & ISA’ involves cashing in an investment by gradually reducing the gain and buying it again within an ISA where assets are sheltered from a capital gains tax (CGT) liability.

Tax allowances

This tax year is the first year of the personal savings allowance, where £1,000 of interest income for basic rate taxpayers and £500 for higher rate is exempt from tax. Additional taxpayers don’t get any allowance. Non-savings income, such as salary, may be below the higher rate threshold but your savings income could push you above this and consequently the lower £500 tax-free allowance for higher rate taxpayers will apply.

New rules were applied at the beginning of this tax year to banks and building society, government and corporate bonds interest payments, even interest on peer-to-peer lending, to pay interest without deducting basic rate tax, and in this coming new tax year collective investment schemes will do the same.

On the 6 April last year, the taxation of dividends also changed from being deducted at source before the income was paid to tax being due on actual dividend received. The first £5,000 of dividends are free from income tax. This is actually quite significant if you consider that dividends earned at 5% per annum on £100,000 of savings would reach the threshold. Dividends above the £5,000 amount are taxed at 7.5% for a basic taxpayer, 32.5% for a higher rate and 38.1% for an additional rate taxpayer.


It is clear that the rates of income tax on dividends are less preferable than the capital gains tax rates. Again, it makes sense from a tax-efficiency purposes to focus on growth-generating investments over income-producing assets. However, falling into the latter bucket, investment bonds may be worth considering as they have the benefit that no extra taxable income is due until a chargeable event occurs, such as cashing in your bond. When you do this, you are given a 20% tax credit for tax paid during the life of the investment. A basic rate taxpayer has no further tax to pay, whereas a higher rate or additional taxpayer would have further income tax to pay on any chargeable gain. You can also withdraw up to 5% per year of the amount invested from the bond without paying any immediate tax.

As you can see it can become quite complicated when planning for the end of the tax year and investment after this, and doesn’t involve just looking at this year in complete isolation to achieve the most tax-efficient outcome. Consulting an expert that can look at your investments and your overall financial situation, including your pension, can ensure that you legitimately keep as much of your money as possible rather than put it in the taxman’s pockets.

Enter your e-mail address to receive updates straight to your inbox

Sign up to Investment Insights direct to your Inbox...

About Author