NEW TAX YEAR CHECKLIST

The beginning of a new tax year presents plenty of opportunities to take control of your finances. There are many tax breaks and reliefs available. In most cases, if you don’t use them, you lose them..

By using tax rules wisely, you can help offset the impact of higher national insurance contributions and for some, heftier income tax bills with thresholds left unchanged.

Here’s our new tax year checklist to ensure you’re maximising tax perks.

1. USE YOUR ISA ALLOWANCE

You can shelter £20,000 in an ISA where it’s exempt from income tax and capital gains tax. This allowance is renewed every April. By taking full advantage you could potentially grow a savings pot worth hundreds of thousands of pounds over time.

2. SHELTER DIVIDEND-PAYING INVESTMENTS

You can move dividend-paying shares into an ISA to avoid big tax bills. Each of us can receive up to £2,000 in dividends tax-free. After that you’ll pay 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional-rate taxpayers. If shares are moved into an ISA – quirkily named actioning a ‘bed and ISA’, no tax is charged.

3. SAVE FOR YOUR CHILDREN

Saving early for your children in a cash account for the longer term doesn’t make sense because inflation will erode the value of the money. Consider a Junior ISA for tax-free investing, where you can shelter £9,000 each tax year until they reach 18.

You could even start a pension for them. Tax rules allow up to £2,880 to be placed in a pension (a Junior SIPP) for under 18s each tax year. HMRC adds £720, totalling £3,600. A Junior SIPP allowance comes in addition to a Junior ISA allowance.

4. MAXIMISE PENSION PERKS

Paying into a pension is extremely tax-efficient as you get tax relief on contributions. Taxpayers get 20% paid by HM Revenue & Customs to their pension and if you pay income tax at a higher or additional rate you can claim relief on your self assessment tax return at either 40% or 45%. There’s an annual limit of £40,000 for all workers – though you can’t pay in more than you earn. Pensions offer the unique benefit of being able to backdate unused allowances up to three years.

Plus, money invested in your pension grows free of capital gains tax and income tax, which will enable your savings to grow much faster.

If you’re already paying into a work scheme you could increase contributions or top up in a personal pension – perhaps a self-invested personal pension (SIPP).

If you’re self-employed you’ll need to make your own pension arrangements. Paying into a pension
will also save on your self-assessment tax bill as a higher rate taxpayer.

5. CONSIDER HIGHER RISK INVESTMENTS FOR MORE TAX PERKS

Venture Capital Trusts (VCTs) offer upfront tax benefits with 30 per cent tax relief. You can invest up to £200,000 into a VCT each year and get up to £60,000 back in tax, although you cannot claim back more tax than you owe. To qualify for the tax break you must hold the investment for at least five years.

You might also explore Enterprise Investment Schemes (EIS) which allow you to back small start-ups either a single company or a fund that holds a cluster of firms in one pooled investment. There is income tax relief at 30 per cent and returns are free of capital gains tax if held for three years. It’s even possible to defer CGT should there be any due.

EIS investments offer a “carry back” facility where you can elect for all or part of your EIS shares acquired in one tax year to be treated as though they had been acquired in the previous tax year. Investing in small companies is high risk, but the tax rules allow you to apply for loss relief if an EIS fails. The maximum amount you can invest is a generous £1 million per tax year or £2 million, providing anything above £1 million is in “knowledge intensive” investments – in other words are carrying out research, development or innovation in a particular sector.

VCTs and EISs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and are viewed as a long term investment. You may not get back the amount originally invested

6. ESTATE PLANNING

The Inheritance Tax (IHT) nil-rate band has been frozen at £325,000 since 2009/10, which means that it has been increasing in real terms over time. Worse still, it’s been frozen at this level until 2026. Make sure you utilise tax allowances for passing on wealth to reduce the value of your estate if you need to. This includes the annual exemption which allows you to give away up to £3,000 each tax year and it’s exempt from inheritance tax. You can also give £250 to any number of people every year, but you cannot combine it with your annual £3,000 exemption. You can give away all types of assets, as well as cash, including property and shares tax-free, as long as you live for seven years after making the gift.

Taking advice on all elements of tax planning is crucial to ensure you get it right – and don’t end up
triggering unknown tax bills

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Having the freedom to spend more time doing the things you enjoy with the people you love is a common goal, which is why retiring early sounds so appealing.

So how can you ensure you are financially secure enough to retire when you want? Here’s our guide:

1. CRUNCHING THE NUMBERS

First you need to work out what you need to live on once your monthly salary disappears. There is no one-size-fits-all for finding that all-important number. Estimates1 suggest that a single person would need £10,900 a year for a minimum standard of living in retirement, £20,800 a year for a moderate form, and £33,600 to feel comfortable.

For couples, the per person amount is lower than that, reflecting shared living costs: the Pensions and Lifetime Savings Associate (PLSA) says a minimum standard would set a couple back £16,700, a moderate standard would be £30,600, and a comfortable standard £49,700.

Your own numbers could differ greatly from this, which is where forward planning with a
professional can help.

2. START SAVING EARLY

One way to boost your chances of having enough to retire early is to start saving in a pension as soon as possible. This means that your contributions have more time in the market to grow and benefit from the magic of compounding. In simple terms this is where your money earns a return in the first year, and in the second year both the original cash and the return benefit from any growth in the second year. In the third year your investment is further enhanced by any returns
achieved. This snowball effect is called compound growth, which can seriously turbocharge your returns and help you reach your goal faster.

3. INCREASE YOUR MONTHLY CONTRIBUTIONS

It’s easy to get stuck in a rut with your savings and keep
on saving the same amount for years on end. This is
particularly true if you’re in a workplace pension and
your salary has been at the same level for a number of
years. Review the level of your contributions and see if
there’s scope to increase them.

4. START A BOOSTER PENSION

If you’ve only been saving in a workplace scheme you can start a self-invested personal pension (SIPP). It’s never too late because the tax breaks on contributions are worth having no matter what your age. Not only that, when you get to retirement it’s likely that you will slide into a lower income tax band, so you’ll be better off again when the time comes to start drawing on your savings.

5. REVIEW YOUR INVESTMENTS

How your money is invested is an important factor in the returns you generate. If you haven’t looked at the way your workplace pension is invested, now is the time. You can ask your scheme provider for a breakdown. If you have a private pension too and haven’t reviewed your investment selection for a while, it’s time to do so. You may need to adjust your portfolio to take more risk or diversify a little more

6. CHECK COSTS

Investing isn’t free. All pensions, whether workplace or private, come with charges. Make sure you’re getting value for money by checking you’re not paying over the odds.

 7. UNDERSTAND PENSION RULES

Retire too early, and you won’t actually be able to access your pension. You can currently only access your pension from age 55, rising to 57 in 20282 . If you’re aiming to retire earlier than that age, you’ll need to call on ISA savings or investments, or income from other sources, for example, rent if you are a property landlord.

7. SELF-EMPLOYED?

If you’re self-employed and one of the 69% who don’t pay into a pension3 then now is the time to start. Depending on your existing arrangements you may well need to start paying in substantial amounts to play catch up and reach your goal. Paying into a pension will also save on your self-assessment tax bill as a higher rate taxpayer

8. IT PAYS TO TALK

An adviser has access to tools that can give you a strong idea about the level of contributions needed to reach your goal of the income you want each year. They can look at what you have already and what you might need to plug the gap and allow you to retire when you want.