This year’s tax-free allowances in Isa and pension contributions are still up for grabs but only until 5 April. All the Brexit nonsense has put many people off committing money this year, understandably. However, there are ways to get your tax perks without getting caught in any Brexit blowout. Here are my three best strategies.
1. Put the money in a cash Isa temporarily
The beauty of the Isa is that, once inside the tax-free wrapper, you can swop the savings between cash and shares as you like. (SMM tip: don’t forget you must TRANSFER the savings. If you sell shares or withdraw the money, the tax perks are lost.) If you’re anxious about shares crashing after a hard Brexit, why not put your £20,000 allowance (or however much you have) in a cash Isa first? Then you can move the money across into shares when you feel more confident about investing.
Most fund platforms will also let you hold the money in cash inside the shares Isa while you make up your mind where to invest. You could then move the cash in a lump sum or, better, drip-feed it in small, regular amounts so you aren’t totally exposed if shares take a nosedive. Be warned though, the interest the platforms pay can be minimal.
2. Roll existing non-Isa cash and shares into Isas
If you don’t want to commit any fresh money this year, you can still pick up the tax perks by transferring any non-Isa cash or shares into an Isa. If you have shares outside an Isa, you will have to sell them and immediately buy them back within an Isa. See my blog on the process which is called ‘Bed & Isa’. If the value is over your £20,000 allowance, you might have to split the process over two years or more, especially if you want to avoid paying capital gains tax.
3. Top up your pension (or someone else’s)
Alternatively, you could invest for the very long term (when Brexit will be a distant memory) and top up your pension. This has the advantage of collecting a bonus from the government on the way in, although money is liable to income tax on the way out, unlike an Isa. This means that, for a basic rate taxpayer, you actually get £100 for every £80 you put in. Higher rate payers get £100 for every £60.
Pension contributions are limited to 100% of your earnings in a tax year and capped at £40,000. You can put in more if you haven’t used your full allowance from any of the previous three tax years. If you’ve anything left over, lucky you, there’s always others, such as a non-taxpaying spouse or even a child, who can benefit. They can put away up to £2,880 in a self-invested personal pension (Sipp) which the government tops up to £3,600.
The main difference between the Isa and the pension is that, while you can get your money from the Isa at any time, the pension is off limits until (currently) age 55. Have a think about when you will need your money as this could dictate whether your go the Isa or the pension route. See our SMM guide to personal pensions for more help.