When does the tax year start?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
The 2019/20 tax year is set to begin on April 6th, with the 2018/19 tax year ending on April 5th.
The start of the new tax year is a significant day for investors, impacting things such as your ISA and Pension.
For example, with an ISA you get a maximum allowance that you can invest within a tax year. You can invest up to £20,000 tax-free in an ISA before 6 April 2019. You can then invest another £20,000 tax-free when the new tax year starts on 6 April 2019. Tax-free means you won’t pay any Income Tax on the interest your ISA generates or the increase in investment value.
It makes sense to be aware of the tax year end and start when it comes to your ISA. You can’t roll over any unused allowance to the next year, so use as much of your allowance as you can before the tax year end to ensure you’re getting the most out of your investment.
Once the new tax year starts, use up as much of your allowance as early as possible, remember that the longer you are invested for is potentially a sound strategy. It gives your money the time to grow, benefiting from the compounding effect of growing your initial investment and the investment returns.
The tax year is also important in relation to your Pension. The Pension Annual Allowance is the amount you can invest into your Pension and claim tax relief on. In the 2018/19 tax year, tax relief can be claimed on up to 100% of your earnings or £40,000, whichever is the lower.
The benefit of contributing as much as you can towards the £40,000 Pension Annual Allowance is that it is a tax efficient way to make your money do more. Rather than losing money to tax, you are putting it to work in your Pension investment. Using your full allowance, or as much of it as you can, is an effective way to make your money do more and build towards a pension pot big enough to retire on. Like your ISA, the tax year on your Pension runs April to April.
With the new tax year just a few weeks away, now is the ideal time to make sure you have made the most of your investments in this tax year. If you’ve still got some ISA allowance left, use your disposable income to invest as much as you can towards using up the allowance. Then start again on April 6, to make the most of the tax-free status and potential long-term returns.
Likewise with your Pension, the turn of the tax year may be an ideal time to consider increasing your contributions. Indeed, if you’re in a Workplace Pension, you’ll see the minimum contributions change From April 2019. Your employer will pay a minimum 3% and you will make this up to the minimum 8% overall contribution with a 5% employee contribution. You will get tax relief on your contribution, meaning your contribution is actually 4% net. This means a minimum total contribution of 8% on annual earnings between £6,136 and £50,000. All contributions, from yourself and your employer included, will count towards your £40,000 Pension Annual Allowance. Consider if you could contribute anymore from your disposable income? The more you contribute now, the more your money could be worth later.