For unincorporated businesses, from 6 April 2024 onwards the cash basis is the default basis of accounts preparation. Unlike the accruals basis under which income and expenditure must be matched to the accounting period to which it relates, where the cash basis is used, income is only taken into account when received and expenditure when paid. This presents some tax planning opportunities around the end of the tax year as regards the timing of income and expenditure.

1. Consider delaying invoicing

If income is likely to be taxed at a higher rate in 2024/25 than in 2025/26, consider delaying invoicing so that a receipt will fall in 2025/26 when it will be taxed at a lower rate.

Example

A sole trader is a higher rate taxpayer in 2024/25, but expects to be a basic rate taxpayer in 2025/26. In March 2025 he undertakes a job, the fee for which is £5,000. If he delays invoicing for the work until April 2025 so that he receives the fee in 2025/26, he will pay tax on it at 20% rather than at 40%.

Delaying invoicing will also delay the time at which the tax is payable on the work. Tax for 2024/25 is due by 31 January 2026, whereas that for 2025/26 is due by 31 January 2027.

• Consider invoicing early

Conversely, if the taxpayer is a basic rate taxpayer in 2024/25 but expects to be a higher rate taxpayer in 2025/26, or if they have not used their personal allowance for 2024/25, invoicing early so that the receipt falls in 2024/25 rather than 2025/26 will save tax.

• Consider advancing expenditure

Taxable profits can be reduced by reducing income or increasing expenditure. Where the cash basis is used, taxable profits for 2024/25 can be reduced by bringing forward planned expenditure so that it falls in 2024/25 rather than in 2025/26.

Example

A sole trader is planning to buy a van. The van will cost £15,000. If the van is purchased before the end of the 2024/25 tax year, the expenditure will fall in 2024/25 and can be deducted in calculating the taxable profits for 2024/25, reducing the tax that is payable for that year. If the purchase is delayed beyond 5 April 2025 so that it falls in the 2025/26 tax year, the sole trader will need to wait a further year to benefit from the tax deduction.

• Consider delaying expenditure

If the taxpayer is likely to pay tax at a higher rate in 2025/26 or has not fully used their 2024/25 personal allowance, it will be advantageous to delay planned expenditure so that it falls within the 2025/26 tax year to secure tax relief for the expenditure at the best possible rate.

Most individuals are entitled to receive a personal allowance. This is the amount that they are able to earn before they pay tax. For 2024/25, the personal allowance is set at £12,570. The allowance is for the tax year only – if you do not use it in the tax year, you lose the benefit of it; you cannot carry any unused amount forward to the next tax year.

As the end of the tax year approaches, if you have yet to use your 2024/25 personal allowance, you may want to consider whether there is scope to do so.

1. Pay a salary or a bonus

If you operate a personal or family company, you may wish to consider withdrawing further profits in the form of a salary or bonus before 6 April 2025. For 2024/25, the optimal salary is one equal to the personal allowance of £12,570 where the allowance is not used elsewhere. If you have yet to pay a salary of this level, there is still time to do so before the end of the tax year.

2. Advance income or defer expenses

For 2024/25 onwards, the cash basis is the default basis of assessment for unincorporated businesses. Under the cash basis, income is assessed when received and expenses recognised when paid. If your taxable profit for 2024/25 is less than your personal allowance and you have no other income, consider whether you can bring profit into 2024/25 rather than 2025/26 by accelerating income (for example, by invoicing early) or by delaying paying expenses.

3. Consider pension payments

If you have reached the age of 55 and have already flexibly accessed your pension, for example, by withdrawing your 25% tax-free lump sum, consider taking further payments from your pension to use up any remaining personal allowance as this will enable you to withdraw further amounts from your pension tax-free.

4. Preserve the allowance if you are a high earner

The personal allowance is reduced once adjusted net income reaches £100,000. For every £2 by which adjusted net income exceeds £100,000, the personal allowance is reduced by £1 until fully abated once income reaches £125,140. Individuals whose adjusted net income is £125,140 or more in 2024/25 do not receive a personal allowance. However, to prevent the loss of the personal allowance, consideration could be given to delaying income, for example, deferring bonus or dividend payments from a personal or family company, or reducing adjusted net income by making pension contributions or charitable donations.

5. Consider the marriage allowance

If you are married or in a civil partnership and are unable to use your 2024/25 personal allowance in full, consider whether you can make use of the marriage allowance to save tax. If your spouse or civil partner is a basic rate taxpayer, you can transfer £1,260 of your personal allowance to them by making a marriage allowance claim. This will reduce their tax bill by £252.

Individuals have a separate tax-free allowance for capital gains tax purposes – the capital gains tax annual exempt amount. Although it has been reduced considerably in recent years and is only £3,000 for 2024/25, making use of the allowance can still generate tax savings of up to £720.

The annual exempt amount applies to reduce the amount of net gains for the year on which capital gains tax is chargeable. The exempt amount is deducted from chargeable gains for the year after allowable losses for the year have been deducted, but before taking account of allowable losses brought forward from previous tax years.

Where a disposal is on the cards which may realise a chargeable gain, if the annual exempt amount for 2024/25 has not been used in full, making the disposal before the end of the 2024/25 tax year rather than after 5 April 2025may be beneficial as it will not eat into the 2025/26 annual exempt amount.

Before making the disposal, the size of the gain should also be taken into account. If the chargeable gain is less than £3,000 and the annual exempt amount is available in full, from a tax perspective, it will be beneficial to make the disposal in the 2024/25 tax year so as not to waste the 2025/26 annual exempt amount.

Spouses and civil partners

Spouses and civil partners each have their own annual exempt amount. Where one partner is planning to make a disposal, they should consider not only their available exempt amount, but also that of their spouse or civil partner. While spouses and civil partners cannot transfer their annual exempt amount to their partner, any transfers of assets between them are at a value that gives rise to neither a gain nor a loss. This means that by making a transfer of an asset or a share of an asset prior to disposal it is possible to utilise both partners’ annual exempt amounts.

Example

John and Julie are married. John wants to dispose of some shares which he expects to realise a gain of £2,700. As John has already used up his annual exempt amount for 2024/25, he is planning to wait until after 5 April 2025 to make the disposal, so that he can set his 2025/26 annual exempt amount against the gain.

However, Julie has not made any chargeable disposals in 2024/25 and her annual exempt amount for 2024/25 remains available. If John transfers the shares to Julie, taking advantage of the no gain/no loss rules, and she disposes of them before 6 April 2025, the gain will be sheltered by her 2024/25 annual exempt amount. By proceeding in this manner, Julie’s annual exempt amount for 2024/25 is not wasted, and both John and Julie have their annual exempt amounts for 2025/26 available to shelter disposals in that year.

Consider your marginal rate of tax

Chargeable gains are taxed at 18% where income and gains do not exceed the basic rate band and at 24% once the basic rate band has been used up. If the gain on a planned disposal will exceed the available annual exempt amount, it is necessary to take into consideration the rate at which the remainder of the gain will be taxed. Depending on the size of the gain, if the taxpayer is a higher rate taxpayer in 2024/25 but will be a basic rate taxpayer in 2025/26, it may be better to wait until 2025/26 to make the disposal, even if the annual exempt amount for 2024/25 is wasted. The aim is to minimise the tax payable on the gain, and there is no substitute for doing the sums.

If you are the owner of a personal or family company, it is prudent to review your dividend strategy before the 2024/25 tax year comes to an end as assessing whether paying a dividend before 6 April 2025 would be beneficial.

Sufficient retained profits

The first point to note is that dividends are payable from retained profits and the payment of a dividend can only be entertained where the company has sufficient retained profits from which to pay a dividend. These are post-tax profits on which corporation tax has been paid.

Unused dividend allowances

Where the shareholders have not used their dividend allowances in full for 2024/25, as long as the company has sufficient retained profits, it will generally be worthwhile to pay a dividend to make use of these unused allowances. All individuals are entitled to a dividend allowance regardless of the rate at which they pay tax. For 2024/25, the dividend allowance is set at £500.

Dividends are treated as the top slice of income. No tax is payable where the dividend is sheltered by the allowance, but the allowance does use up part of the tax band in which it falls. In this way, the dividend allowance operates like a zero-rate band rather than a true allowance.

Where a company has more than one shareholder, the dividend strategy will depend on whether the company has an alphabet share structure. This is where each shareholder has their own class of share, for example, A ordinary shares, B ordinary shares, etc. Where this is the case, the dividend payable to each shareholder can be tailored to the level of their available dividend allowance.

In the absence of an alphabet share structure where all shareholders have the same class of share, dividends must be paid in proportion to shareholdings.

Unused personal allowance

While it will generally be preferable to pay a salary equal to the personal allowance before extracting profits as dividends, if the company has shareholders who do not work in the company and who have not used their personal allowance for 2024/25 in full, it can be beneficial to pay them further dividends to mop up their unused personal allowance. There will be no further tax to pay on dividends which are sheltered by the personal allowance.

Unused basic rate band

If profits are needed outside the company and the shareholder has not used up all their basic rate band for 2024/25, it may be preferable to pay a dividend before 6 April 2025 where it will be taxed at the dividend ordinary rate of 8.75% if the dividend will be taxed at a higher rate (either the dividend upper rate of 33.75% or the additional dividend rate of 39.35%) if the dividend is paid in 2025/26.

Leave the profits in the company

If the dividend allowance and the personal allowance have been used in full and funds are not needed outside of the company, it may be preferable to leave the profits in the company as paying a dividend before 6 April 2025 will come with an associated tax bill.

There are various reasons why tax may be overpaid, and when more tax has been paid than is due, it is understandable that the taxpayer will want this to be refunded as soon as possible. The process for claiming a refund depends on why the overpayment arose.

Employees

An employee may have paid too much tax on their employment income. This may be the case if their tax code is incorrect or because they have incurred expenses on which tax relief is due.

A claim for relief for employment expenses can be made using the online service on the Gov.uk website or by post on form P87. It is important to include the required supporting evidence with the claim.

If the employee has received a tax calculation letter (P800) showing that they are due a refund, they should follow the instructions in the letter for claiming that refund. Where the letter indicates that the claim can be made online, the claim should be made using the online service on the Gov.uk website at www.gov.uk/tax-overpayments-and-underpayments/if-youre-due-a-refund. The claimant will need to provide the reference number from the P800 letter and their National Insurance number. The refund should be made to the claimant’s bank account within five days. A refund can also be claimed through the taxpayer’s personal tax account or using the HMRC app, or by writing to HMRC. Where the tax calculation letter informs the taxpayer that they will be sent a cheque, they do not need to make a claim as the cheque will be sent to them by post. This should be received within 14 days of the date on the P800 letter.

Taxpayers who have yet to receive a P800 for 2023/24 should receive it by the end of the March.

Self Assessment overpayments

A taxpayer may be due a refund under Self Assessment if their income has fallen and the payments made on account exceed their liability for the year. They may also be due a repayment if a loss relief claim has been made.

An application for a refund where tax has been overpaid can be made in the return, and where this has been done HMRC will usually send the repayment automatically within two weeks of the return being submitted. If a refund was not requested in the return, it can be claimed through the taxpayer’s online Self Assessment account. They simply need to choose the ‘Request a Repayment’ option and follow the instructions.

A refund can also be claimed through the taxpayer’s personal tax account by selecting ‘Claim a refund’ and following the instructions. A similar process is followed where a refund is claimed through a business tax account. Refunds can be paid into UK bank accounts, or the taxpayer can request a cheque. A refund is normally paid within two weeks of making a claim.

When starting a business, there are various decisions to make and tasks to perform. One of the first questions to address is whether to run the business as a sole trader, whether to set up a partnership with others or whether to form a company. The way in which a business is operated will determine the taxes that are payable and legal obligations that must be met.

A person operating as a sole trader is in business for themselves. This is arguably the simplest way to run a business.

Registering with HMRC

A person operating as a sole trader will need to register with HMRC for Self Assessment if they have trading income of £1,000 or more. This is the total from all unincorporated businesses, not per business.

If a person is already registered for Self Assessment, for example, because they have investment income or income from property to report to HMRC, they do not need to register again. Rather, they will simply need to complete the Self-Employment pages of the return to report details of their business income.

If a new trader is not registered for Self Assessment, they will need to do so by 5 October following the end of the tax year in which they first became liable to register. For example, if a person started a business in 2024/25 and their turnover was more than £1,000, they will need to register for Self Assessment no later than 5 October 2025. A person can register via the Gov.uk website (see www.gov.uk/register-for-self-assessment).

A person who has previously been registered for Self Assessment, but did not file a return for the last tax year, will need to register again to reactivate their account.

Tax and National Insurance

A sole trader must pay income tax on their profits. Their profits form part of their total taxable income, which will be liable to income tax to the extent that it exceeds their personal allowance for the tax year. For 2024/25 and 2025/26, the personal allowance is £12,570. Income tax is charged at 20% on the first £37,700 of taxable income. Taxable income in excess of £37,700 up to £125,140 is taxed at 40%, and anything over £125,140 is taxed at 45%. Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of income in excess of £100,000, such that anyone with adjusted net income in excess of £125,140 does not receive a personal allowance.

Self-employed individuals must pay Class 4 National Insurance if their profits exceed £12,570. This is payable at a rate of 6% on profits between £12,570 and £50,270 and at 2% on any profits in excess of £50,270. Where profits exceed the small profits threshold (set at £6,725 for 2024/25 and increasing to £6,845 for 2025/26), no Class 4 National Insurance contributions are payable. However, the trader will earn a National Insurance credit which will provide them with a qualifying year for state pension purposes. Sole traders with profits which are below the small profits threshold can opt to pay voluntary Class 2 contributions to build up their state pension entitlement. At £3.45 per week for 2024/25 (increasing to £3.50per week for 2025/26), this is a much cheaper option than paying voluntary Class 3 contributions, and may be beneficial if the sole trader would not otherwise secure a qualifying year.

Tax and Class 4 National Insurance contributions must be paid by 31 January following the end of the tax year. Once the tax and Class 4 liability reaches £1,000, payments on account must be made for future tax years.

VAT

A sole trader will need to register for VAT if their VATable turnover exceeds the VAT registration threshold of £90,000 in the previous 12 months, or is expected to do so in the next 30 days.

Records

The sole trader will need to keep records of their business income and expenses to enable them to work out their taxable profits. It is a good idea to have separate personal and business bank accounts to avoid personal and business expenses getting mixed up. The trader should also keep invoices, receipts, etc.

Tax due under Self Assessment for 2023/24 should have been paid in full by midnight on 31 January 2025, along with the first payment on account for 2024/25. Financially, January is a difficult time for many people and they may be unable to find the funds to pay all the tax that they owe. Where this is the case, ignoring the problem will not make it go away; rather, it will make it worse as interest and penalties will be charged, increasing the amount that will have to be paid to HMRC to clear the bill.

As far as interest and penalties are concerned, interest is charged from the due date to the date of payment. Currently, interest on overdue tax is charged at 2.5% above the Bank of England base rate. At the time of writing, the late payment rate was 7.25%. However, from April 2025, interest on overdue tax will be charged at a rate of 4% above the Bank of England base rate. It is easy to see how this can soon mount up. If tax remains due 30 days after the deadline,  a penalty of 5% of the unpaid tax is charged. Further penalties of 5% of the unpaid tax are charged six months after the due date and 12 months after the due date.

Payment plans

However, there are steps that can be taken to take control of the situation and to clear the debt. One option is to set up a Time to Pay arrangement to pay the tax in instalments. It may be possible to do this online. Although interest will still be charged where payment is made in instalments, there will be no penalties to pay.

A taxpayer should be able to set up a Self Assessment payment plan online if all of the following apply:

• the latest tax return (i.e. that for 2023/24) has been filed;
• the date is within 60 days of the payment deadline;
• the amount owed is £30,000 or less; and
• the taxpayer does not have any other payment plans  or debts with HMRC.

Taxpayers who are unable to set up a payment plan online should contact HMRC to see if it is possible to agree to pay what they owe in instalments. HMRC will take into account their income and expenses, and also whether they have any savings. Taxpayers with savings will be expected to use these to pay any tax that they owe.

When setting up a plan, it is important to be realistic about the payments and ensure that these are manageable – the taxpayer can always clear the debt earlier if they are able to do so. If a payment is missed, HMRC will usually contact the taxpayer to find out why. They may let the taxpayer renegotiate the plan. However, if payments are regularly missed, HMRC may start action to collect the debt in full. This may involve instructing a debt collector or collecting the tax direct from the taxpayer’s wages or bank or building society account. If the tax remains unpaid, HMRC may instigate court action.

Plan ahead

To ensure that money is put aside to meet future tax bills, consideration could be given to setting up a budget plan. This works a bit like a savings account in that the taxpayer makes regular payments to HMRC which are set against future tax bills. If the taxpayer has not put enough aside to meet the bill, the balance must be paid by the normal due date.

The VAT flat rate scheme is a simplified flat rate scheme which can be used by smaller businesses to save work. Under the scheme, businesses pay a set percentage of their VAT inclusive turnover to HMRC rather than the difference between the VAT that they charge and the VAT they suffer on the goods and services that they buy. The percentage that they need to pay depends on the sector in which they operate, and also on whether they are a limited cost business. The main advantage of the scheme is that it reduces the work in complying with VAT. For example, there is no need to record the VAT on purchases. However, for some businesses this may come at a cost, as the amount that they pay over to HMRC may be more than would be payable under traditional VAT accounting. Before joining the scheme, it is advisable to do the sums.

Eligibility

A business is eligible to join the scheme if it is VAT registered and it expects its VAT taxable turnover to be £150,000 or less in the next 12 months. This is everything that is sold that is not exempt from VAT. However, a business is not allowed to rejoin the scheme if it has used it previously and left within the previous 12 months. The VAT flat rate scheme cannot be used by businesses that use a margin or capital goods scheme, nor can it be used with the cash accounting scheme; instead, the flat rate scheme has its own cash-based method to determine turnover.

A business must leave the scheme if, on the anniversary of joining, its turnover in the last 12 months was more than £230,000 including VAT, or it is expected to be so in the next 12 months. A business must also leave if they expect their turnover in the next 30 days to be more than £230,000 including VAT.

The flat rate

The flat rate depends on the type of business. The percentages can be found on the Gov.uk website at www.gov.uk/vat-flat-rate-scheme. A business benefits from a discount of 1% in its first year of VAT registration.

Businesses that are classed as a limited cost business pay a higher rate of 16.5% regardless of the sector in which they operate. This is a business whose spend om relevant goods is less than either 2% of its turnover or £1,000 a year (£250 a quarter) if more than 2% of turnover. Where costs are close to 2% of turnover, the business may need to perform the calculation each quarter to ascertain whether they need to use the limited cost business percentage of 16.5% or that for their sector.

Not everything that a business purchases counts as ‘goods’ for the purposes of the calculation – only ‘relevant goods’ count. The main exceptions are services, such as accounting and advertising, car fuel (unless the business operates in the transport sector) and rent. Where a business incurs significant costs on services or fuel but their other goods amount to less than 2% of their turnover, they may be better off using traditional accounting. The limited cost business percentage of 16.5% of VAT inclusive turnover equates to 19.8% of VAT exclusive turnover, leaving only a narrow margin to cover any VAT suffered.

Example

A photography business joins the VAT flat rate scheme and in its first quarter has VAT inclusive turnover of £24,000 (£20,000 plus VAT). Its relevant goods in the quarter are £1,250. As this is more than 2% of the turnover, the business is not a limited cost business.

The flat rate percentage for its sector is 11%. However, as it is in the first year as a VAT registered business it benefits from a discount of 1%. Therefore, it must pay VAT of £2,400 to HMRC (10% of £24,000).

Capital goods

If you opt for the flat rate scheme, you will not normally be able to claim back VAT separately on capital goods unless they cost more than £2,000 and you do not intend to resell them.

The payment of National Insurance contributions is linked to entitlement to the state pension. If sufficient National Insurance contributions of the right type are paid for a tax year, that year counts as a qualifying year for state pension and benefit purposes. A person may also secure a qualifying year if they are awarded National Insurance credits for that year. This may be because they have low earnings or are in receipt of certain benefits, such as child benefit or carer’s allowance.

People reaching state pension age on or after 6 April 2016 need 35 qualifying years for a full state pension and at least ten qualifying years to receive a reduced state pension.

Different classes of NIC

Employed and self-employed earners pay different classes of contribution. Employed earners pay Class 1 contributions if their earnings exceed the primary threshold. For 2024/25 this is set at £242 per week, £1,048 per month and £12,570 per year. However, where their earnings are between the lower earnings limit (set at £123 per week, £533 per month and £6,396 per year) and the primary threshold, the employee is treated as if they had paid National Insurance contributions, albeit it at a zero cost. Where earnings in the tax year are equal to 52 times the weekly lower earnings limit (so, £6,396 for 2024/25), the earner secures a qualifying year for state pension purposes. Employed earners whose earnings are below this level will not build up state pension entitlement via their earnings. Contributions payable by the employer (secondary Class 1, Class 1A and Class 1B) do not provide any pension or benefit rights for employees.

Self-employed earners now build up entitlement through the payment of Class 4 contributions, in respect of which a liability arises where their profits from self-employment are more than the lower profits limit (set at £12,570 for 2024/25). Where profits are between the small profits threshold (set at £6,725 for 2024/25) and the lower profits limit, the self-employed earner receives a National Insurance credit which provides them with a qualifying year.

For 2023/24 and earlier tax years, self-employed earners built up their state pension entitlement through the payment of Class 2 contributions; for 2023/24 and earlier tax years, the payment of Class 4 contributions did not provide any pension or benefit rights.

Self-employed earners whose profits are below the small profits threshold can pay voluntary Class 2 contributions to preserve their state pension entitlement.

Voluntary Class 3 contributions

Individuals who will not have 35 qualifying years by the time that they reach state pension age may want to pay voluntary Class 3 contributions in order to boost their state pension. However, before paying the contributions, it is important to check that doing so will be beneficial. An individual can check their National Insurance record and state pension forecast online on the Gov.uk website or via the HMRC app. Making voluntary contributions is only worthwhile if a person will not otherwise have 35 qualifying years when they reach state pension age and if, after making the contributions, they will have at least ten qualifying years. This is the minimum needed for a reduced state pension. An individual may also be able to pay voluntary contributions if they have reached state pension age and want to plug gaps in their record to boost their state pension.

Class 3 contributions for 2024/25 are payable at the rate of £17.45 per week. Class 3 contributions must normally be paid no later than six years from the end of the tax year to which they relate (so by 5 April 2031 for 2024/25 contributions). Where contributions are paid after the end of the tax year to which they relate, they are usually paid at the current rate where this is higher. Individuals who have gaps in their National Insurance record between 6 April 2006 and 5 April 2016 can make voluntary contributions at the 2022/23 rate of £15.85 per week until 5 April 2025 to plug those gaps.

Self-employed earners with profits below the small profits threshold can pay voluntary Class 2 contributions instead of voluntary Class 3. This is a much cheaper option (£3.45 per week for 2024/25 rather than £17.45 per week). They can also plug gaps in their record between 6 April 2006 and 5 April 2016 by making contributions at the 2022/23 Class 2 rate of £3.15 per week by 5 April 2025.

A combination of higher interest rates and stealth taxation may mean that you are now paying tax on savings income for the first time. If this is the case, it may be worth taking out an Individual Savings Account (ISA) to enjoy more of your investment income tax-free. ISAs are available from a number of financial institutions, including banks and building societies, credit unions, friendly societies, stockbrokers, peer-to-peer lending services and crowdfunding companies.

There are different types of ISAs for persons aged 18 and over:

• cash ISA;
• stocks and shares ISA;
• innovative finance ISA;
• Lifetime ISA.

The previous Government had announced plans to introduce a British ISA. However, the current Government are not going ahead with it.

There is also a Junior ISA for children under the age of 18.

ISA limit

There is an annual ISA investment limit of £20,000 in a tax year. The limit may be invested in a single account or spread across different types of accounts. The maximum amount that can be invested in a Lifetime ISA is £4,000 a year. Spouses and civil partners each have their own limit.

A separate limit of £9,000 per year applies to Junior ISAs.

Cash ISA

Savings in a cash ISA can be held in bank and building society accounts and in some National Savings products. Interest earned on savings held within a cash ISA is tax-free.

Stocks and shares ISA

Investments within a stocks and shares ISA can include shares in companies, unit trusts and investment funds, corporate bonds and Government bonds. However, shares owned in a personal capacity cannot be transferred into a stocks and shares ISA, although it is possible to transfer shares from an employee share scheme into an ISA.

Income and gains from the investments held within the ISA are tax-free.

Innovative finance ISA

Investments within an innovative finance ISA can include peer-to-peer loans (i.e. loans given to other people or businesses without using a bank), crowdfunding debentures (i.e. investments in a business by buying its debt) and funds where the notice or redemption period means that the funds cannot be held in a stocks and shares ISA. Arrangements that are already in existence outside the innovative finance ISA cannot be transferred into an innovative finance ISA. Income and gains on investments within an innovative finance ISA are tax-free.

Lifetime ISA

A Lifetime ISA is designed to help people to save either for their first home or for retirement. Cash and stocks and shares can be held in a Lifetime ISA. Returns are tax-free. Lifetime ISAs also benefit from a tax-free Government bonus equal to 25% of the amount saved, capped at £1,000 a year. However, there are more conditions than for other ISAs.

The maximum amount that can be invested in a Lifetime ISA is £4,000 a year. This counts towards the overall limit on investments in ISAs, set at £20,000 per tax year.

A person must be aged 18 or over and under 40 to open a Lifetime ISA and the first payment must be made into the account before the individual turns 40. Once an account is open, the individual can continue to contribute up to £4,000 a year until they reach the age of 50. Beyond age 50, the account remains open and will continue to earn interest, but no further deposits can be made and no further government bonuses will be paid.

Money can only be withdrawn from a Lifetime ISA without penalty where it is used to buy a first home once the individual has reached age 60 or if they are terminally ill with less than 12 months to live.

On the face of it, the 25% Government bonus makes a Lifetime ISA an attractive option for saving for a deposit for a first home. However, the money in a Lifetime ISA can only be used in this way if the home is purchased with a mortgage and does not cost more than £450,000. In London and other areas with high property prices, buyers may struggle to find a first home within this price bracket. If a first home is purchased for more than this, the saver has the choice of either leaving the funds in the account until they reach the age of 60 or withdrawing the money saved and forfeiting the government bonus. The bonus will be clawed back if the funds are withdrawn other than for one of the three permitted reasons.

Junior ISAs

A Junior ISA is a long-term tax-free savings account for children. There are two types of Junior ISA, a cash ISA or a stocks and shares ISA and a child can have one or both types. The account can be opened by a parent or a guardian with parental responsibility. However, the money belongs to the child. As any interest is tax-free and not taxed on the parent, a Junior ISA is an attractive option for a parent wishing to save for their child. The child can take control of the account when they reach the age of 16, but cannot withdraw the money until they turn 18.