How to optimise your financial circumstances before tax year end
The tax year end on 5th April is fast approaching, yet there are still things you can do to make sure your finances are in order and to ensure you are being as tax efficient as possible. Find out what you should consider to help optimise your circumstances, and to be better prepared for the years ahead.
Choose your ISAs carefully, then top them up
ISAs can be a powerful option to benefit from tax-free growth over time, with maximum individual allowances each year of £20,000 for adult ISAs and £9,000 for Junior ISAs. You should use as much of these allowances as you can afford – and they can rapidly make a big difference for a family. For example, £58,000 a year can be sheltered from the taxman for a family consisting of two adults and two children.
Of course, a major consideration is whether to choose Cash ISAs or Stocks and Shares ISAs. For long-term growth – and once you understand the role risk plays in your consideration – there is clearly a more beneficial option. A recent MoneyWeek story highlighted that over a 10-year period, equities will beat cash returns 9 out of 10 times. In the same article our CIO Iain Barnes said, “We expect investors will continue to be rewarded for putting their money to work in the years to come despite the risks that lie ahead.”
(Re)Assess your pension plans
It’s hard to beat a pension for doing the heavy lifting in building a comfortable retirement pot. The annual pension allowance – the maximum you can save into a pension every year – is now £60,000 and the lifetime pension allowance (most recently £1.073 million) is abolished, allowing you to build up a considerable sum for your future.
The tax-free benefits allow a pension to really shine:
- Tax relief when you pay in.
- Tax-free growth and income.
It is advisable to top up your pension each year by as much as you can to take advantage of these benefits, which can compound significantly over time.
This year, especially, you have two ways to boost your pension pot meaningfully. First, like other years, if you act by 5 April (tax year end), and have the funds to spare, you can apply any unused pension allowance from the past three years and use it this year.
Time is running out, however, to boost your state pension. If you have incomplete years of national insurance contributions, you only have until tax year end to ‘buy’ extra years to fill gaps going back to 2006. This state pension calculator shows how much you might receive – a small investment now could nicely enhance how much extra you get from the state every year.
Many of you will also be aware about the further change to pensions after last October’s Budget, which may prompt action or you to closely assess your plans. The rule change means that from April 2027 unused pension funds and death benefits will be subject to inheritance tax of 40% once the ‘nil rate band’ has been utilised. We explore the impact in more detail in this article – the changes may, for example, encourage some people to start planning gifts earlier than they had previously planned.
Use your CGT allowance
If you make a profit from selling an investment capital gains tax (CGT) may be due. After sharp cuts over the past couple of years, the individual annual exemption amount now stands at £3,000 (double that with a partner’s allowance). So if it is not possible to shelter potential gains in a tax wrapper such as an ISA or pension, it may be beneficial to realise gains to this limit as it can’t be carried forward to future years.
Other sensible steps to consider
While the areas above may be more pressing, this could be an opportunity to assess whether you can optimise other aspects of your investments and financial plans.
Ensure you are well diversified: It’s impossible to predict which assets will perform best from year to year. To ensure you can target growth opportunities and also protect against potential losses, it’s crucial to have an efficiently invested mix of assets in your investment portfolio, whether that’s in your pension, ISA or taxable portfolios.
Evaluate how much you pay in fees – and act if need be: We stress this often – because it makes such a difference. If you overpay by 1% per annum in fees, you will be giving away 14% of your capital unnecessarily over 10 years. For every £100k you have invested, £14k could be in your pocket rather than someone else’s over 10 years (assumes 5% average annual returns).
Discover why 75% of our clients are in the Netwealth Network – up to 10 family members and friends can be in a Network, with each benefiting from lower fees while keeping their investment autonomy.
Helping the next generation: If you can afford to pass on some of your wealth – to help a child or grandchild – each year you are allowed to gift up to £3,000 without inheritance tax (IHT) applying. You can also use any unused allowance from last year. To give away larger sums, if you live for seven years after you make the gift, there is no IHT to pay, with a downwards sliding tax scale over the course of those seven years.
Financial planning advice: Studies by the International Longevity Centre (ILC) have found that those who take regulated financial advice are measurably better off a few years later. However, whether or not to take advice will often depend on your age and circumstances. For example, if you are building up to retirement, you receive an inheritance or are getting divorced, financial advice could be vital to help you avoid costly mistakes.
You may also benefit from a thorough check-up for your financial health with a Financial MOT. This one-off service can help you stay on track whether you have a financial plan or not. A Netwealth financial adviser will guide you – helping you build new skills, as well as improve and sense-check your plans for your future. Sign up here for personalised insights and expert guidance.
We have also recorded a new webinar that specifically targets the important actions to consider before tax year end. Watch ‘Your to-do list ahead of tax-year end’ on our YouTube channel.
As always, if you need help in any way, please get in touch.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted solely to our services. We do not consider the whole of the market, nor offer advice in relation to tax compliance, insurance products, or the transfer of defined benefit pensions.
