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The Turn of the Tax Year
Happy New Tax Year
Ringing in the new tax year isn’t quite as memorable as its better-known calendar counterpart. But this year the turn of the tax takes new meaning. In a time of economic uncertainty characterised by record inflation increasing the cost of living, taking advantage of the end of the current tax year could save you hundreds, if not thousands. Here are 4 ideas you could try to ease the rising financial burdens.
Invest in your pension!
Have you ever heard of the annual pension allowance? It’s the difference between investing before the 5th April or after. Or put simply, it’s the amount of money you’re allowed to save into your various pension pots in a single tax year – whilst still reaping the rewards of tax relief. If you exceed this amount, you’ll start having to pay tax on any contributions you make.
Therefore, it’s important that, before the tax year comes to an end, you’ve made sure that your pension contributions are making the most of this allowance. If you can afford to, consider contributing before the tax year ends so that next year’s allowance isn’t used up!
The annual allowance is currently £40,000 for most people, but you can also save up to 100% of your earnings and benefit from tax relief.
To check if you’ve gone over the allowance – and by how much, click here.
Unlock that Income Tax
By investing in a pension, you could also be reducing the amount of income tax you pay. The first £12,570 of your income is considered tax-free, but anything over that is subject to income tax. How your income tax is calculated depends on your salary, but you might find yourself on the threshold, or close to, another bracket of income tax.
In that case, contributing more to your pension before the new tax year could help to drive down income tax – with a difference of 20%.
For instance, if your salary is £50,271 or above, you’ll be paying a higher rate of income tax: 40%. But if you contribute enough to your pension so that your annual income dips below £50,270, you’ll be eligible to pay the basic rate of income tax instead – a 20% decrease. Just imagine what that kind of saving could lead to!
Remember, only contribute more to your pension if you can afford to and have funds to live on after increasing your contributions.
ISAs to the rescue!
Take advantage of your annual ISA allowance to really squeeze every last bit out of the tax year before it ends. ISAs are Individual Savings Accounts and allow you to save money – tax free – by either investing it into stocks and shares or by holding it in cash. Everyone in the UK is entitled to invest up to £20,000 into their ISAs, but nothing past that in a single tax year.
You can mix and match too. If you’ve got a Lifetime ISA alongside a Stocks and Shares ISA, you could save £16,000 into the latter and £4,000 (the maximum for a LISA) into the former – but it must not exceed £20,000.
For many ISA providers, you’ll have until midnight on the 30th March to make any final contributions before the £20,000 limit is reset, sending your potential tax-free saving down the drain.
This is particularly imperative for Lifetime ISAs because these reward any contribution you make with an additional 25% bonus paid by the government up to £4,000. For instance, if you contribute £100, the government adds in an extra £25. But that potential bonus will be reset during the new tax year, meaning that you’ll lose the chance to take advantage of this year’s government bonus.
The Shoebox of Shame…
If you attended the Pension Geeks roadshow in January or last August, you might remember something called the ‘Shoebox of Shame’: a name given to the folder, file, shelf, or shoebox that’s full to the brim with bank statements, pension statements, and everything in between.
So as it’s the end of the tax year, now could be the perfect time to do what some people call a bit of ‘life admin’. This could mean digging out your old Shoebox of Shame, rifling through old pension documents and tax returns, and simply getting your finances in order before the new tax year is rung in.
This could also mean reviewing your pension pot, your savings, or your long-term financial plans and ensuring you’re on track for the future you want.
If you’re unsure, the IMI Pensions City website could help to give you an idea about whether you’re Starting Out, Getting There, or Moving Along Nicely.
There’s no better time than at the turn of the tax year to simple evaluate – or re-evaluate – your situation as a whole.