The new year is often a time of reflection, reassessment, and planning for the changes we’d like to make over the next 12 months. Many of us will be looking at the savings, investments, and pensions we currently have or that we wish to put in place.
As we have less than three months until the close of the tax year on 5 April, it’s wise to check now that you’ve maximised the various tax allowances you’re entitled to. Two of the key allowances relate to ISA and pension contributions.
Maximising your ISA allowance
ISAs are an ideal way to shelter your cash and investments – and the potential growth on these – from the effect of income tax and capital gains tax. The maximum ISA contribution allowance is currently £20,000 per tax year.
If you have surplus cash and haven’t yet contributed the full £20,000 allowance to an ISA, this should be done ahead of the close of the tax year. Over 18s can contribute this sum into a cash ISA or a stocks and shares ISA, or a combination of the two. Lifetime ISAs and innovative finance ISAs are also available, but the rules around these are a little more complex.
Children aged 16 or 17 can only contribute this sum to a cash ISA. Under 18s can also hold a Junior ISA, with a contribution allowance of £9,000 per tax year.
If you have a general investment portfolio that is subject to income tax and capital gains tax, you can also benefit from transferring funds here to your ISA (i.e. transferring £20,000 out of the general account and into the ISA). This would make your overall investment portfolio more tax-efficient over time. The approach of the end of the tax year is an ideal time to implement these transactions if not already done.
Maximising your pensions allowance
Depending on your income tax position, your UK earnings, and other circumstances, you may be able to contribute a sum of between £3,600 and £40,000 gross to a pension per tax year. You may also be able to contribute more if you have any unused allowance from the previous three tax years. You can also contribute a sum of £3,600 gross to a pension on behalf of a minor each tax year.
A financial planner can calculate these sums for you and make a recommendation for how much you can contribute this tax year. As with ISAs, any growth on funds within a pension is free from income tax and capital gains tax. Pension funds also have additional benefits, such as being free from inheritance tax in future.
Personal pension contributions attract income tax relief from HMRC of 20% of the net amount contributed. If you’re a higher or additional rate taxpayer, you could reduce your income tax bill by making use of pension contributions each tax year. Again, a financial planner can help you work out what the total saving might be and put a recommendation in place for how to achieve this.
If you have already maxed out your pension contributions, or you’re restricted in how much can contribute to a pension each tax year, a financial planner may recommend other investment products to help you reclaim some income tax on your earnings.
Speak to a financial planner
The new year is a fantastic opportunity to assess your finances and make the most of your tax allowances. Meeting with a financial planner can help to boost your investment and pension portfolios and shield more of your funds from taxes where possible.
Financial planning can also help you establish a long-term strategy toward your financial goals. Cash flow planning can illustrate the effect of growth and taxes on a portfolio over time, and show how regular savings and contributions to investments and pensions can benefit you in the future.
With 2023 having just begun, take this opportunity to dust off your bank accounts and investment portfolios and let a financial planner help guide you to implement a more tax-efficient strategy.
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