Make sure you beat the ISA deadline

Time is running out if you want to make the most of this year’s Individual Savings Account (ISA) allowance, so you’ll need to get your skates on.

ISAs are a tax-efficient way of investing, helping you minimise the tax you pay on your savings and investments. No matter how little you can save, putting away a small amount regularly each month in a tax-efficient ISA can make a big difference in the long term.
An ISA is a tax-efficient wrapper into which you place your investments to protect them from the taxman. Any investment growth, no matter how much, is then free from income and capital gains tax (a 10% tax credit is still payable on UK share dividends and cannot be reclaimed).

Stocks & Shares ISA Allowance 2013/14

You can invest up to £11,520 in a Stocks & Shares ISA in the current tax year (2013/14)

Invest in funds that in turn invest in shares quoted on stock markets around the world

More risky than a Cash ISA, but with the potential for
greater returns

Cash and Stocks& Shares combination

Alternatively you can invest up to £5,760 in a Cash ISA and the balance in a Stocks & Shares ISA, or just cash if you prefer.

Junior ISA limit

You can invest up to £3,720 in a Junior ISA

You can invest in stocks and shares, cash or a combination of both

You cannot invest in a Junior ISA if the child was eligible for a Child Trust Fund Account

The value of investments can go down as well as up and you may not get back the amount invested. The value of tax savings in an ISA depends on individual circumstances. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.

Tax attack

With tax increases the prospect for the foreseeable future, it is essential that you make the most of every available tax relief. Using the tax breaks available to you also makes good financial sense.

Different ideas will suit different people. If you would like to discuss any of these opportunities, we can recommend solutions that are tailored to you. We’ve provided some examples of the ways in which legitimate planning could save you money by reducing a potential tax bill in the run up to the tax year end on 5 April 2014.

Investing in a pension is one of the most tax-efficient ways to save for your retirement. From 6 April 2014, the pension lifetime allowance (LTA) is being reduced from £1.5m to £1.25m which could radically affect your retirement strategy. The LTA is important because it sets the maximum amount of pension you can build up over your life and benefit from tax relief.

If you build up pension savings worth more than the LTA, you’ll pay a tax charge on the excess, potentially at 55%. However, some affected individuals could elect for ‘Fixed Protection 2014′ before 6 April 2014, and the £1.5m limit can be preserved. From 6 April 2014 (until 5 April 2017), individuals will also have a fall-back option of electing for ‘Individual Protection 2014′ to preserve their individual LTA at the lower end of £1.5m, the actual value of their pension fund at 5 April 2014 or the standard LTA (i.e. £1.25m in 2014/15).

If the total of all your pension funds is likely to be at or near £1.25m by the time you retire, you should quickly seek professional advice on whether opting for Fixed Protection 2014 and/or Individual Protection 2014 is appropriate.

The annual contribution limit for an individual (the total of personal contributions and those made by an employer) is £50,000, within pension input periods (PIPs) ending before 6 April 2014, and you receive tax relief for the contributions at your highest marginal tax rate. But from 6 April 2014, the maximum reduces to £40,000.

If you have not made contributions up to the limit in 2010/11, 2011/12 and 2012/13, then the unused relief may be available for carry forward into 2013/14. However, you must have been a member of a registered pension scheme in the tax year giving rise to the unused relief, and any contributions made in the year reduce the amount available to bring forward.

A pension contribution paid before 6 April 2014 also reduces both your tax bill for 2013/14 and, if appropriate, your payments on account for next year.
Tax relief is available even for non-taxpayers, so you can invest in a pension for a non-earning spouse. Non-earners can contribute £3,600 per tax year (the Government will automatically pay £720 in tax relief, reducing the amount you pay to just £2,880).

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Individual Savings Accounts (ISAs)
Make sure that you use your 2013/14 ISA allowance to shelter your savings from tax. There is no capital gains tax or further income tax to pay on investments held in an ISA, making them one of the most tax-efficient ways to invest.

In the current tax year you are permitted to invest up to £11,520 into a Stocks & Shares, or alternatively you can invest up to £5,760 in a Cash ISA and the remaining amount in a Stocks & Shares ISA. In the new tax year (6 April 2014 – 5 April 2015), the limit rises to £11,880, meaning in the next few months a couple could shelter £46,800 from tax using both years’ allowances.
Junior Individual Savings Accounts (JISAs) enable parents or grandparents to save up to £3,720 a year, tax-efficiently, for their children or grandchildren.

The value of investments and income from them may go down. You may not get back the original amount invested.

If appropriate, consider making individual gifts of up to £3,000, which you can do each year free from Inheritance Tax (IHT). You could also use any unused allowance from the previous year, meaning a couple can give away up to £12,000 now and a further £6,000 on 6 April, potentially saving £7,200 of IHT (charged at 40%).
Have you made a Will? A good Will should minimise tax and give your family flexibility and protection. Dying without one means your assets will be distributed to your family without reference to your wishes using the intestacy laws, potentially after IHT at 40% is paid.
If you already plan to make substantial gifts to charity in your Will, leaving at least 10% of your net estate (after all IHT exemptions, reliefs and the ‘Nil Rate Band’) to charity could save your family IHT.

In many family circumstances, the use of a formal trust can help you protect and enhance your family’s future finances. The timing of creating a trust may have significant tax implications so, if you have long-term financial goals, the sooner you seek expert advice on your options the better.

Inheritance Tax Planning, Will Writing and Trust Advice are not regulated by the Financial Conduct Authority (FCA).

Capital gains
Everyone has a capital gains tax (CGT) free allowance of £10,900 in the current tax year. If you haven’t realised gains of this amount, take a look at whether assets can be sold before 6 April 2014. If you have used up your allowance, consider deferring selling assets until the next tax year or transferring them to a partner. If your spouse either pays no tax or at a lower rate, you could reduce the tax bill substantially.

Bed & ISA is one effective way to use your CGT allowance. By selling your shares or funds and immediately buying them back inside this year’s ISA as a contribution, you can harvest gains, sheltering future growth from tax.

You can increase your CGT annual allowance by registering any investment losses on your tax return. Once they have been registered, you can use them to offset gains made in the future, effectively increasing your CGT allowance.

If you have substantial investments, consider rearranging them so that they produce either a tax-free return or a return of capital taxed at a maximum of only 28%, rather than income taxable at a maximum of 45%.

Tax advice is not regulated by the Financial Conduct Authority (FCA).

Advanced investments
Tax-paying, sophisticated investors who are prepared to take higher risks in return for the potential for higher rewards should be aware that attractive income tax reliefs are available. If you are a tax payer, you will receive a tax rebate of up to 30% (subject to your total income tax bill) when investing in a Venture Capital Trust (VCT). Enterprise Investment Schemes (EIS) income tax relief of 30% – up to a maximum of £300,000 reclaimed tax in any year. Seed Enterprise Investment Scheme (SEIS) income tax relief of 50% for subscriptions for shares of up to £100,000, irrespective of the investor’s marginal tax rate.

The value of investments and income from them may go down. You may not get back the original amount invested. Some funds will carry greater risks in return for higher potential rewards. Investment in smaller company funds can involve greater risk than is customarily associated with funds investing in larger, more established companies. Above average price movements can be expected and the value of these funds may change suddenly.

Desperately Seeking income

for equities

He may only have been in the job for just over six months, but Mark Carney, the Governor of the Bank of England, has already signalled his intention to do things differently and this is most noticeable in his concept of ‘forward guidance’.

Ongoing problem in the UK’s productivity levels

In the past, the Monetary Policy Committee minutes focused their thoughts on the current situation for the economy, the dangers for inflation and their plans for interest rates. However, Mark Carney has added in a commitment (albeit with a few caveats) that they won’t even consider increasing interest rates until unemployment drops below 7%. This is designed to help the Bank address an ongoing problem in the UK’s productivity levels, which appear to be well behind those of other developed economies.

An investor’s point of view

However, from an investor’s point of view, the consequences of this promise might be somewhat stark. Based on the Bank’s projections, it looks like rates could stay where they are until the third quarter of 2016 at the earliest. That said, these things are never quite as simple as they appear – and in this case, the market doesn’t appear to agree with the Bank. The UK’s borrowing costs continue to rise and many traders are predicting that rates will actually go up in late 2015.

Funding for long-term growth

There are now some indications the Bank may use quantitative easing to bring the market in line, but even if it doesn’t, investors could be facing two years of rock-bottom income from their cash investments. As a result, many are being forced to look further afield for a higher income and are discovering the benefits of equity income funds. These are funds that invest in established companies paying regular dividends. Investors can choose to have this income paid directly to them or reinvest it back into the fund for long-term growth.

Achieving a decent income

It’s easy to see the appeal of equity income in this environment. Equities are the only major asset class that has managed to increase its yields over the six years since the financial crisis started[1]. In addition, UK equities towards the latter part of 2013 were yielding 3.7%, which is significantly more than cash and UK government bonds did[2]. It is important to remember that this is not guaranteed and past performance is not a guide to the future.

Higher-yielding shares

Of course, the current market situation isn’t the only reason to choose a fund that focuses on higher-yielding shares. For a start, these shares actually tend to outperform lower yielding stocks over the years[3] – and their prices don’t tend to fluctuate in value as much. In part, this performance may be down to the dividends themselves. Companies don’t like to cut their dividends, so even if their share price is falling, they will try to maintain (or even increase) their payments, which helps protect an investor’s total returns.

Helping the share price rise again

What’s more, when the share prices of these companies fall, their yield (the dividend they pay, expressed as a percentage of the share price) goes up. A high dividend yield that is seen as sustainable can attract more investors and this interest may then help the share price rise again. It’s also the case that dividends are normally paid by larger companies and these businesses tend to be comparatively lower risk.

An option for long-term growth

When the income payments are reinvested, they provide investors with a second source of returns. Over the long term, compound growth can magnify these returns dramatically – nearly 60% of the total return from UK equities can be attributed to the reinvestment of dividends over the past 25 years[4].

Accessing this potential

There are two main types of equity income fund. Some focus on the UK, which has a long established dividend culture, while others aim to benefit from the greater opportunities offered by a global approach (as a rule, the global funds are considered riskier than the UK-focused ones).

Looking ahead

The start of 2014 could be a good time for investors to explore new options, particularly as inflation will be silently eroding the value of their savings if they leave their money in cash. Equity income funds could give you a steadier ride, while the dividend payments have the scope to provide an income or help boost returns through all conditions.

[1] Datastream 30.09.13
[2] Datastream 09.10.13
[3] Citigroup 30.09.13 in US$
[4] Datastream 01.09.88 to 30.08.13 based on the FTSE All-Share Index
Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.