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Planning for a new tax year

There are plenty of things that might keep you up at night, and “did I miss a tax deadline?” is probably one of them. Fear not, our ultimate guide to the tax year can help make sure you don’t miss a thing.

Understanding the tax year helps you build good money habits

Tax has a well-deserved reputation for being difficult to navigate. This comes down to the array of taxes that the government imposes. Taxes on savings, investments and earnings all come with bands, reliefs, allowances and exemptions. Add the fact that the rules can change in small but important ways from one year to the next and you’ve got a recipe for a costly mistake. Knowing how to maximise your tax efficiency during each financial year is a really important part of your ‘good money habits’. This guide will cover the following topics to help you make timely decisions over the tax year.

1. All the different things you need to keep an eye on during the year.

2. The important dates, so you don’t miss deadlines.

3. How you can prepare and organise so you make the best financial decisions.

4. What the tax year means for your own unique set of circumstances.

5. How to build good money habits for the future.

What is the tax year, and why does tax planning matter?

The UK tax year runs from the 6th of April to the 5th of April each year. These dates don’t change but tax rules and regulations do change and it is important to stay up-to-date, especially if you don’t have a financial adviser. It is also crucial to keep an eye on the cut-off date for important tax planning elements like ISAs (individual savings accounts) and capital gains allowances.

The main items that might change for a new tax year are:

As you can see there is a lot to think about. This is what makes planning for a new tax year so important. The government will normally give plenty of notice about what changes are coming up and when they will start affecting you. If you find making a plan for the new tax year a bit daunting or would like some advice on what strategies might work best for you in 2020-2022, book a no-obligation consultation with us here.

An Individual Savings Account is a special type of savings account that offers tax free interest up to a certain amount each year. You can get an ISA in the form of a cash ISA, offered by most banks and building societies or a stocks and shares ISA. They come in various types, each with different ways of helping you meet your savings and investment goals. 

Important dates in the tax year

When planning for the tax year, there are a few key dates to keep in mind.

6th April — Start of a new tax year. Unlike New Year’s day, which is all about looking forward, you might have a few regrets if you don’t make full use of your allowances and reliefs in the last tax year.

31st July — You need to pay any tax you owe by this date. You’ll be fined for late payment, and may have to pay interest.

5th October — If you need to register for self-assessment, this is the deadline. If you’re not sure if you need to be on the self-assessment register, use this handy guide produced by the Government or contact the tax office.

31st October — The deadline to get a paper self-assessment form back to the tax office. If you plan on using the digital filing system, you can ignore this date.

31st January — The deadline for getting the digital tax return filed online. You may have to pay a penalty if you file late.

From this spread of dates you can get a feel for the ways you can plan for the whole year and beyond. If you take a proactive approach to planning throughout the year, you won’t be left panicking if you get close to a deadline.

Financial planning steps we’d recommend:

  • Do a personal financial review every year.
  • Take an interest in the Budget, released once a year by the Chancellor of the Exchequer. It’ll clue you in on what to expect for the future.
  • Develop healthy money habits.
  • Keep track of income vs expenditure, plan for big costs like a new car or holiday ahead of time.
  • Make sure any debt is structured, accounting for the lowest interest rate, and balance that against any savings you have.
  • Check your will. Even if you don’t feel anything has changed, a quick once-over won’t hurt. Inheritance tax laws can and do change and needlessly losing a slice of your estate to the tax man probably isn’t what you had in mind.

Most rules on tax can be found in the UK tax tables. This is the officially published set of taxes due, along with how they are applied in different circumstances, such as what your total earnings are for the year.

You can find a summary of these tax tables here

How the tax year might affect you personally

We’re all different and our circumstances are unique. There is no one tax year strategy that works for everyone. Depending on your exact situation and the mix of income, savings, debt, pension and investment within your portfolio, you’ll need to look at the tax year from different angles.  Overall you should be looking to plan into the longer term for tax efficiency. Thinking longer term also means not reacting in a ‘knee jerk’ manner to big changes, like the recent market reaction to the pandemic. Those that sold shares in April crystallised their losses but, over the course of the year, most markets have recovered well so those that kept their shares may have reclaimed part of that loss. A tailored approach is important, so we’ve broken this tax planning guide down into specific categories. You might well fit into more than one of these, so combine them together to figure out what applies to you as an individual.

TECHNICAL WITH TAX : Part surrenders, the 5% rule.
For qualifying investment bonds, every premium payment into the bond gives a tax deferred withdrawal allowance of 5% of the payment, in the year where it was paid, and for the next 19 years of the policy. Any allowance that’s not used can be carried forward. In this way an investor can withdraw 5% of a single premium investment, every year, for 20 years without a chargeable event occurring.

Which tax categories do you fall into?

If you’re a saver: With the interest rates where they are, you can’t afford to miss a penny of savings at the moment. That means being tax efficient and making use of the maximum allowances, and these often go hand in hand. This comes down to making use of the personal savings allowance (£1,000) per year for a basic-rate taxpayer, at the time of writing, and the ISA allowance (£20,000).  Any savings that accrue interest, like Government gilts, bonds, unit trust or similar funds will count towards your limit. Low income earners (£12,500 and under) can benefit from a ’starting rate’ of income tax of 0% for up to £5,000 of savings interest.

If you’re an employee: One of the big benefits of employment is that many of the fine details regarding the tax year are taken care of via your tax code. If you are employed you won’t need to file a self-assessment form for additional savings or investments.. However, other income streams, like share dividends, rental income or even charging people to park on your property, will mean you’ll most likely have to do a self assessment. A workplace pension or savings scheme can attract tax relief such as ‘relief at source’ or ‘net pay’ arrangements. You’ll need to check with your employers how it works in each case.

If you’re an investor: When it comes to investments, looking at all the rules is much more time intensive than it is for savings. Tax efficiency is an important part of investing, and so a good understanding of the tax rules here is essential. Since the range of possible investment types is very diverse, you’ll have to account for pension rules, dividend tax rates and rules around the buying and selling of assets like shares and property. We can’t cover all of that in this guide (so we’ve written a separate guide: Complete Guide to Investment Planning), but you’ll need to be clear how each of your investments will be taxed so your overall strategy makes the best use of allowances.

If you’re self-employed: Depending on the structure of your business, sole-trader, partnership (or limited liability partnership (LLP), or limited company (LTD), you’ll need to arrange your tax affairs differently. As a sole trader or partnership / LLP, you’ll be taxed under income tax rules based on your business’s profits. This keeps things fairly simple. You notify Her Majesty’s Revenue and Customs (HMRC) using the self assessment system. It’s your responsibility to alert HMRC that you’re now self-employed. These types of businesses don’t allow the owner to be paid as PAYE, even if you operate a PAYE scheme for employees.

If you run a limited company: Things get more complex. A company director can remunerate themselves via a combination of dividends and declaring themselves an employee of the company and using PAYE. Your personal circumstances will dictate what is the most tax efficient way to pay yourself as a company director. Both dividends and salary have a personal allowance, but are taken off your overall total income and taxed at different rates.

For example: If you earned £3,000 in dividends and £29,500 in wages, your total income would be £32,500. If your personal allowance is £12,500, you’re left with a taxable income of £20,000 (£32,500 minus £12,500). In the basic rate tax band, you’d pay:

  • 20% tax on £17,000 of wages
  • No tax on £2,000 of dividends, thanks to the allowance
  • 7.5% tax on £1,000 of dividends

The above is based on the tax bands at the time of writing.

Should you sell any shares in your limited company, you may have to pay capital gains tax. As a company director, it’s worth spending the time to look at the company’s goals and aims alongside your own personal financial aims. Aligning the two can offer advantages in tax and wealth planning.

PRO TIP : Making the most of self employment.
On face value tax rules seem simple when you are self-employed, but if you dig a little deeper there are some perks to being self employed. HMRC offer tax relief on a variety of allowable work-related expenditure which minimises your tax bill. Over two-thirds of self-employed people don’t have a pension and they are missing out on tax relief. For a basic rate taxpayer, every £100 you put into your pension will then be topped up with an additional £25 by the government. If you are paying the higher rate tax of 40%, then there will be an extra tax relief on top of this to claim, check this is still right. A financial adviser will help you get out of the mindset of “my business is my retirement fund”. If you make enough profit to pay tax at the higher rate of 40% then adding any donations to charity to your tax return can reduce your tax bill. The switch from a salaried role to working for yourself has challenges especially in the areas of taxation.

Client’s eye view: I am annoyed for not doing something sooner, we could have got so much more tax back over the years

When Sandra first approached Unividual, she had managed her own finances for years. She booked a free consultation with one of Unividual’s Chartered Financial Planners in Bristol, Simon Jones. The first meeting went well and Simon went on to review Sandra’s finances, understanding her current situation and what her objectives were, before designing a revised plan for Sandra moving forward. She explains: “Simon made everything easy to understand. He showed us in great detail how we could be earning more money from our savings and saving tax through our pensions. I am annoyed at myself for not doing something sooner, we could have got so much more tax back over the years.” The work doesn’t stop there though, Simon will regularly review Sandra’s finances over the years.

Ask a financial planner for tax planning advice

How to build good money habits going forward

The start of a new year is a great time to take a fresh look at your finances, just like we assess our health and lifestyle habits.  For all those people out there wanting to manage and plan their own finances, here is a little insight into some of the things we are doing with our clients that you could apply to yourself.

  1.  Look at your finances holistically, build a solid plan that takes into account your long-term aims. How much will you earn over the next few years? How much will you spend? What are your long-term goals? An annual review of your finances is a great habit to get into.
  2.  Keep track of the interest you’re paying on debt and the amount you’re earning from interest. It may feel good to be actively saving but if it’s losing you money it’s not going to achieve that aim.
  3.  Organise your finances when you need to. Don’t be scared to change banks, accounts or investments if it’s what makes sense. Being active and looking for the best deals out there is important. Dig deep into what’s on offer and make sure you’re meeting those long-term goals.
  4.  Save where you can. A penny saved is a penny earned. Cutting your mobile contract or cancelling that unused monthly membership package might only save £20 a month, but it all adds up. You can then put these savings into an account or invest them for the long-term and watch the pot grow.
  5.  Don’t let saving for retirement be ‘something you’ll do tomorrow’. Ensuring you can retire without financial worries is one of the biggest favours you can do yourself.
  6. Take the time to check you are protecting everything you earn, if you were unable to work tomorrow how would you pay the mortgage and provide for yourself and the people that rely on you.

Tax allowances don’t last forever

While keeping yourself tax efficient is no mean feat, not doing so can ruin a savings plan, put holes in your investment strategy and plunder your pension pot. Allowances, most notably those connected with ISAs, are a ‘use it or lose it’ affair. You can’t go back in time if you miss the 5th April deadline. Currently the annual ISA allowance is £20,000 for cash, investment and peer-to-peer ISA products. Being super organised and planning ahead mean you’ll have all the important dates at your fingertips when you need them. Set reminders and keep on top of the announcements and changes in tax legislation that matter to you. This will mean you can make the most of your allowances, for example using spare cash in the bank to top up your ISA and make the most of your £20,000 tax free allowance. Get a comprehensive list of tax rates, tax allowances and thresholds in Unividual’s 2021/22 tax tables.

How does financial advice fit in with tax?

It can be tough trying to make sense of tax and for our clients we keep them steered in the right direction. Where you spend, where you save, and where you invest all have important tax considerations and long-term consequences. Other clients may have spent a few years managing their own finances and are ready to take things to the next level and use an adviser for high-risk, government backed, tax-efficient investments, such as Enterprise Investment Schemes or Venture Capital Trusts. Then there are business owners who think “I have an accountant” and don’t understand that accountants and financial advisers do different things and work together as part of your team. An accountant looks in the rear view mirror and administers the tax year just gone by. A financial adviser is the windscreen, focusing on the car moving forward along a planned journey. Working in partnership with an experienced financial adviser can clear things up and shine a light on the best way forward. We can point you in the right direction, and give additional help like offering support for businesses affected by COVID-19 and we can also recommend an accountant if you already haven’t got one.

The view from the team: Scott Gurd, Chartered Financial Planner.

“The tax year, and tax in general, can be a real headache. I live and breathe tax law, so am only too aware of the pitfalls and lost gains they can cause. People don’t quite realise how no tax planning can impact on their lives until they experience it for themselves. For example, when a parent suddenly dies and you realise they didn’t seek advice on inheritance tax and you have a huge tax bill to pay.  At Unividual, we work tirelessly to keep up to date so we can help clients dot all the ‘i’s and cross the ‘t’s. It’s that attention to fine detail that really makes the difference and produces tax efficient financial planning that works for the long term.”

Discuss tax efficient financial planning with Scott

Useful tax planning resources

If you are still wondering how to navigate your financial plan around the tax year, please get in touch. You can also read more using the in-depth tax year resources below.

* When you click these links Unividual is no longer responsible for the content as they are external sites.

If you’ve found this guide useful, please do share it with others.

Disclaimer: All facts and figures are correct at the time of writing.

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