The new tax year has arrived, and with it, a new set of allowances and subscriptions. If March involved the usual last-minute scramble to pay into your pension and ISA, you might be keen to avoid that same rush next year.
Putting a plan in place now will allow you to think about what you want from the year ahead, and how best to achieve these goals.
This might mean putting money aside regularly throughout the year.
Not only could a more measured approach prove less stressful, but it might also benefit you financially.
Here are three resolutions to help you make the most out of the new tax year.
1. Get to grips with your allowances now
In his March Budget, chancellor Rishi Sunak announced several changes to allowances and taxes, as well as some freezes. While some take effect this year, others won’t apply straight away.
Understanding which allowances apply to you will help you think about how to manage your contributions during the year ahead. Avoiding a last-minute rush can also help you make informed decisions and avoid mistakes.
Here are some allowances to consider.
Pension Annual Allowance
The pension Annual Allowance for the 2021/22 tax year is £40,000. This is the amount you can pay into your pension while still benefiting from tax relief.
Be aware, though, that other allowances might apply.
You could trigger the Money Purchase Annual Allowance (MPAA) if you access taxable defined contribution (DC) pension benefits. The pension tapers could apply if your “adjusted income” is higher than £240,000 and your “threshold income” exceeds £200,000.
Speak to us if you’re unsure of the pension allowance that applies to you.
Lifetime Allowance (LTA)
Experts expected an LTA announcement in the Budget. Rather than the predicted rise in line with the consumer price index (CPI), however, the chancellor froze the allowance at its current amount of £1,073,100.
Exceeding the LTA could cost as much as 55% of the excess amount – if you take that excess as a lump sum – so being aware of your current position in relation to the LTA is crucial.
The ISA allowance remains at £20,000 for the 2021/22 tax year. This is split between all ISAs you hold.
Think about how you might split your ISA subscriptions across any Cash ISAs and Stocks and Shares ISAs you hold, to make the most of their tax efficiencies.
2. Spread your contributions to take advantage of interest and compounding
If you can afford to make pension or ISA contributions at the start of the tax year, or even regularly throughout it, you could see financial benefits by the end of the tax year.
Pensions and ISAs are both tax-efficient. You receive tax relief on your pension contributions, don’t pay tax on the interest you earn in a Cash ISA, and gains you make on investments in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).
The sooner you increase the funds held in these products the longer you can take advantage of these efficiencies. You could enjoy a higher interest payment over the year, and benefit from the effects of compounding.
Let’s say you earn 5% interest on £10,000. You would receive £500 interest in year one. In year two, however, you would receive 5% on the cumulative total of £10,500. Your interest in year two would be £525.
The extra £25 in this example might not seem like a huge amount, but on a larger fund – and further compounded over time – it could make a massive difference to the size of your investment.
3. Avoid last-minute decisions and potential mistakes
Understanding your allowances and making plans early puts you in control. You can budget for the year, making affordable contributions that maximise tax efficiencies and ensure you don’t miss out come tax year-end.
Avoiding a last-minute panic could also prevent you from making mistakes, such as over-subscribing to an ISA, for example. You also won’t need to worry about potential delays in March when providers become overloaded with requests.
The financial decisions you make should be aligned with your long-term financial goals. Not needing to rush these decisions means that you stand the best chance of making the right ones.
Get in touch
Speak to Hartsfield early in the year and we can help you put together a financial plan that makes the most of the savings and investment products you hold. This puts you firmly in control, allowing you to think about your goals and understand how you will achieve them.
Please get in touch and find out how our team of expert financial planners can help you.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.