HOW WOULD A FINANCIAL ADVISER START THE NEW TAX YEAR?
It’s important to get your finances in shape to start the new tax year with a bang.
Here’s how two of our expert financial advisers would start the new tax year.
Pension, ISA, and tax rules can change, and any benefits depend on your circumstances. Different tax rates and bands apply to Scottish taxpayers.
This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. We can advise you on how to make the most of your tax allowances through financial planning, but if you need complex tax calculations we recommend speaking to an accountant.
Use your ISA and pension allowances
ISAs are one of the easiest and simplest ways of saving money. This tax year you can add up to £20,000 to an ISA. Once it’s in there, you won’t have to pay UK income or capital gains tax on that money. You don’t even have to fill in a tax return for it.
It makes sense to use your ISA allowance early, as the sooner the money is in an ISA, the sooner you won’t have to pay UK income and capital gains tax on it. It also means it then has more time to grow.
If investing in an ISA, like a Stocks and Shares ISA, isn’t right for you, you can still use other ISAs to save tax, like a Cash ISA. If you don’t need your money for at least five years, it’s usually best to invest it in the stock market. A Cash ISA can be a good option if you’ll need the money before then or have a short-term goal in mind.
Remember unlike cash, all investments can rise as well as fall in value, so you could get back less than you invest.
Investing in a pension, like a Self-Invested Personal Pension (SIPP), helps you save for retirement, and it can also reduce your tax bill. It’s a win-win.
If you’re a UK resident, under 75, the general rule is you can add as much as you earn each tax year and receive tax relief. This is usually capped at £40,000 a year. But anyone who earns over this might be able to make use of the carry-forward rule and add more.
HOW TAX RELIEF WORKS?
Remember though, money in a pension can’t normally be taken out until 55 (57 from 2028), when up to 25% is usually tax-free with the rest taxed as income. Your allowance could also be less than £40,000 if you earn over a certain amount or have previously accessed benefits from a pension.
HOW MUCH CAN YOU PAY INTO A PENSION?
With the freeze on income tax thresholds until 2026, more people are likely to end up paying more in income tax. Making pension contributions from your income could mean you slip back under a threshold and pay less tax. As with ISAs, you don’t have to pay UK income tax or capital gains tax within a pension.
Did you know?
Pensions also don’t usually count towards your estate for inheritance tax purposes. Contributing to a pension could be a tax-efficient way to pass on money to loved ones.
Make the most of the power of regular saving
Investing monthly is one of the most powerful ways to build wealth. It’s all down to ‘pound cost averaging.
Drip-feeding money into investments, rather than investing a lump sum, helps smooth out the ups and downs in the stock market. It essentially averages out the price of buying investments, so you’re not going all-in at one price.
This can be beneficial when the price goes down as you’ll buy more units or shares. However, when the market rises above the original price, fewer units are bought.
The start of a new tax year is a great way to get into better savings habits.
It’s important to plan your regular savings ahead of time, especially if you’ll be using a tax wrapper like an ISA or SIPP. A good time to plan is at the beginning of the tax year. That way you can calculate how much of the allowance your monthly contribution will use up.
For example, £500 every month into an ISA will use £6,000 of your £20,000 ISA allowance in 2022/23. This means you’ll have an allowance of £14,000 to use before 5 April 2023.
Review the risk in your portfolio
Understanding risk is important. You need to be comfortable with the ups and downs that come with investing in the stock market. You can find a level you’re comfortable with by diversifying and using the right mix of investments (your asset allocation). The level of risk within a portfolio is often based on your goals and investing time frames, so step one is to nail those down.
You should review your portfolio once or twice a year to make sure it still meets your goals, attitude to risk, and any changes in your circumstances.
WHAT YOU NEED TO KNOW ABOUT RISK
If you’re an HL client, you can check if you’re using the right mix of investments by using the ‘Portfolio Analysis’ tool on the ‘My Account’ screen when you’re logged in.
Don’t forget about tax
When you’re reviewing your investments, it’s important to think about tax too.
Some investments are taxed differently than others. For example, income from dividends is taxed differently compared to income from corporate bonds & government bonds (gilts).
This is particularly important if you are or are about to be drawing income from your portfolio.
Income from your investments is taxed at a basic, higher, or additional rate.
Dividends Bonds and gilts
- Basic rate 8.75% 20%
- Higher rate 33.75% 40%
- Additional rate 39.35% 45%
You might also have a personal savings allowance and dividend allowance to offset some of this income before it becomes taxable.
The rates a Scottish taxpayer pays on dividends and savings income are determined by the UK bands, not the Scottish bands. This also applies to capital gains tax.
Holding a mix of different types of investments that invest in different sectors and parts of the world is the best way to diversify.
- Types of investment or asset classes – cash, bonds, funds, shares, and property are the main ones, and they’ll all have different risk levels. The idea is that they have different drivers of returns – each will perform differently at different times. As your age, goals, and risk appetite change, then you’ll probably want to change the amount you have in each asset class.
- Geography – why stick to one country, when you can have the world? Just like asset classes, different stock markets around the world are driven by different things. And often, the best-performing stock market will change from year to year.
It might feel uncomfortable to put some of your money into areas that aren’t doing well – but when the tide turns, and it usually does, you’re more likely to be in the right place at the right time.
Beware of capital gains tax
Every year, you can grow your wealth without paying capital gains tax.
The capital gains tax allowance is £12,300 and has been frozen until 2026. Any gain above that which falls within the basic-rate tax band is normally taxed at 10%. Any part of the gain which falls into the higher or additional-rate bands is normally taxed at 20%. But higher rates can apply to residential property.
One way to use your capital gains tax exemption is by selling investments not sheltered from tax and reinvesting into a more tax-efficient account, like an ISA or pension. Although there may be exit charges and different features and costs associated with these accounts so make sure you check first.
Doing it this way means you don’t pay any capital gains tax on the sale of your investments once they’re in an ISA or pension. Your future investment is also then sheltered from tax. Keep in mind though that you can’t usually take money out of a pension until at least age 55 (57 from 2028).
Make use of the spousal exemption
If you’re married or in a civil partnership, there are rules around gifting assets. These can be helpful but a little complicated to get your head around.
You don’t normally have to pay capital gains tax on gifts to a spouse. You can also divide your assets to make better use of each capital gains tax exemption.
This means couples can have a combined allowance of £24,600 (£12,300 each) and share assets between them without triggering a capital gains tax bill. To help cut your tax bill, even more, the assets can be held by or transferred to the spouse paying the lower rate of tax.
Just remember, once an asset is gifted, you can’t normally take it back.
You could also pay less income tax as a couple if gifting brings one of you under a tax threshold without tipping the other over one.
If one spouse is a non-taxpayer, and the other is a basic-rate taxpayer, the non-taxpayer can give £1,260 (10%) of their allowance to their spouse in the current tax year.
This means the basic rate taxpayer could earn is £13,830 before they start paying tax, rather than £12,570.