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Three ways to capitalise on the end of another tax year NOW

We'll let you in to a little secret. Every year we show our clients how they can make the most of the tax year end period. A lot of people don't know there are a host of ways to make good use of this time to benefit you financially. For those wanting to get ahead in life and make the most of their money, January is a great time to install new habits and make use of tax allowances...here's how.

For more on Tax read our 2022/23 Guide

How does the tax year affect you?

When we talk about the tax year, we’re not just talking about taxes. Savings and investments are an important part of your whole tax year picture. Since the tax year runs from the 6th of April in one year to the 5th of April in the next, you may think you’ve got loads of time to get things sorted. In reality, you can benefit financially and emotionally by taking a proactive approach when planning your finances for the year.

Practically speaking, you have until the 5th April to make changes for the new tax year. This means that in January we should all be looking at our New Year’s Resolutions and thinking about how to review your financial position.  Part of this is sitting down in plenty of time ahead of April and making any tweaks necessary to maximise all your allowances by adjusting your tax affairs.

Why do you want to utilise your tax allowances? You make the best use of your savings, not over-paying on tax but also making sure you pay the right amount of tax. So, what steps can you take to use the last few months of the tax year as wisely as possible? We’ll start by taking a look at your savings allowances.

Tip One: Three allowances you could utilise before the start of a new tax year

The good news is that savings allowances can be used right up to the end of the tax year. What on earth does that mean you ask? There are two primary elements for savings tax in the UK: a personal allowance and an ISA allowance. We’re going to take a look at both of these and the benefit of utilising a tax allowance.

1. Your personal allowance

This is the amount of interest you can earn from savings before you need to pay tax on that interest. This amount is based on your income tax rate, and works as follows:

If your total earnings are less than £17,570, you have a starting savings allowance (tax free savings interest) of £5000. If you earn over this, that £5000 no longer applies. This is on top of your personal income tax allowance and Personal Savings Allowance. After this, the following rates apply.

  • Income up to £0 – £12,570: Earn £5,000 in savings interest before paying tax.
  • Income of £12,571 – £17,570: £5,000 tax-free interest allowance and an additional £1,000 of interest Personal Savings Allowance.
  • Basic rate tax payer £17,571 – £50,270: The £5,000 rate no longer applies and the £1,000 Personal Savings Allowance remains.
  • Higher rate tax payer £50,271 – £150,000: The Personal Savings Allowance is halved to £500.
  • Additional rate £150,000 and over: No savings allowance.

The practical upshot of this is that you should manage your savings based on the point at which you will pay tax on the interest. Interest over any allowance is considered income, and could potentially move your tax bracket.

If you’re a basic rate taxpayer, it’s worth noting you’d need a very large sum in a standard savings account to reach the typical £1000 Personal Savings Allowance amount. With high street interest rates what they are at the moment, you’d need around £57,500 in savings before earning enough interest to pay tax.

What you need to do between now and April

  1. If your savings are going to attract tax, then it may be wise to consider using that money in a different way. This means not leaving it in your bank account, which could lose you money. Now is the time to act if this is the case.
  2. There are other ways of saving money outside of your personal savings allowance that may be helpful, one of these is an ISA which we’ll review in detail below.
  3. It’s also a good idea if you have an overdraft or credit card balance to think about paying these down.
  4. Some people are keen to pay down their mortgage but there are some positive reasons why you might choose not to do that which you can speak to your financial adviser about.
  5. You’ll need to look at each applicable interest rate and work out how to make the most effective use of your savings.

2. Marriage allowance

The marriage allowance for married couples or civil partners means you can transfer £1,260 of your personal allowance to your married or civil partner. If one partner is under the personal allowance and the other over, this can yield a reduced combined tax bill of up to £252 in the tax year.

If you haven’t got time to do these things or are worried about paying tax on your interest, get in touch to see what we can do to help.

3. Your ISA savings allowance & children ISAs

An ISA, Individual Savings Account, is a special type of savings account that is designed to encourage saving. It’s sometimes known as a “tax wrapper” because it ‘wraps around’ your savings and protects them from tax. The interest you gain from money in ISAs does not come off your Personal Savings Allowance, making them a very effective savings vehicle.

In the UK everyone over 18, no matter their tax status, is eligible every year for a £20,000 ISA allowance. This means each year you can invest this amount into an ISA, either cash or shares. As we’ve seen, the interest you subsequently earn on this sum does not attract tax.

For a children’s ISA, this rate is £9000. Saving for children can really make a difference long-term but still needs to be properly planned.

If ISAs form part of your savings plan, as we approach the end of the tax year you should make sure you’ve put as much as you can, up to the limit, into your ISA.

What you need to do between now and April:

1. Check the details of your ISA to see if you need to top it up to the maximum allowed.

2. It’s also a good idea to check the performance of the ISA.

3. Set up ISAs for your children and if you already have them see if you have utilised the full allowance of £9,000.

4. Consider doing some investment planning to make sure you have your money in the best place for your personal requirements.

 

Now is a good time to review your ISA, or take a look at your mortgage, when you are ready just get in touch with us if you want professional advice. Financial advice isn’t just for rich people, it is more affordable than people realise.

Tip Two: Capital Gains Tax

Most taxes have some combination of allowances, upper rates or transferable elements that let you access efficiencies. If you don’t plan for these, come the new tax year you loose them all together. That makes the months of December, January, February, and March important when it comes to making the best use of the tax year, as it’s your last chance to make changes.

Let’s look at capital gains tax in particular. When you sell certain items for a profit, such as a second home or shares, Capital Gains Tax (CGT) may apply. You can read more about Capital Gains tax in this post. While you have an annual exemption of £12,300, you may need to pay tax on amounts earned over this in any tax year. However, because you can transfer assets to a spouse or civil partner freely without direct tax implications, you can often ensure you both use your exemptions effectively.

3. Connecting the dots between personal and business finances

If you own a limited company then joining up the planning between personal and business tax and savings is an important step in being tax efficient. You may be paying yourself a mixture of salary and dividends as part of your remuneration package. As dividend and income taxes are calculated differently, you have a chance to balance these two for maximum tax efficiency. Take a look at our in-depth article on dividend tax for more information. We have a comprehensive guide on all the taxes you pay in the UK that can help your long-term planning. There is a lot business owners can do to reduce the amount of tax they are paying, such as utilising pensions.

Are your personal and business tax affairs considered together? If not you could be missing out on ways to streamline your tax payments but we are always here to help if you want professional advice.

What do you need to do right now?

January is the time to really take stock of your situation. You’ve only got a few months left to make sure you transfer any funds or assets to ensure you make the best use of all the tax thresholds and allowances available to you.

Even if you’re confident that you are ready for the end of the tax year, it’s a good idea to double-check. It’s always the time to start planning for next year, since that kind of longer term planning reaps great rewards. Plus it can be really annoying finding out that you missed out on ways to increase your savings or make full use of a joint allowance with a partner. Much of the financial planning we do for our clients is making sure all these are used to their full potential.

You have nothing to loose, act now, and make sure the end of the tax year doesn’t have a sting in its tail.

 

Author: Cherie-Anne Baxter

Date: 24/01/2022

Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

Tax treatment varies according to individual circumstances and is subject to change.

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