As one tax year ends, another begins - meaning there is no let up when it comes to finances.
It’s never too early to get your finances in order and there are a few key things we should all be doing in order to strengthen our financial stance.
Planning your finances for the year ahead is key to staying on track with your goals, to ensure successful outcomes, and for peace of mind.
Here, Anthony Morrow, co-founder of low-cost financial advice platform OpenMoney, shares his top tips for investors and savers for the new financial year.
Evaluate your existing finances
The start of the tax year gives a real opportunity for people to reevaluate their finances, and to get their priorities or financial foundations in place before deciding where to invest their cash.
We’d advise creating different pots of money for the different goals or objectives you have this year, such as an emergency fund, short term cash savings, medium term S&S ISA or investment accounts, long term pension/LISA etc.
Step back and take a big-picture view of your finances to see if anything needs to change.
Just because you have a new allowance (meaning how much you can save or invest tax free each year – it’s £20,000 for the 2021/22 tax year) on the 6 April doesn’t mean you should rush to get your money in an ISA instantly.
Research your ISA options
You can open one of each type of ISA each tax year, and you can spread your £20,000 allowance however you want between them (but only up to £4,000 for the Lifetime ISA).
The ISA rules mean that you can only contribute to one of each type of ISA per tax year, so decide wisely, and do your research before making a decision.
What are your savings goals? Are you missing out on potential growth by having too much money saved in a cash ISA? Would a stocks and shares ISA better suit your needs?
To give you a starting point, think about the charges involved, the level of risk you are comfortable with, and the service and advice offered by the provider.
Don’t forget, there is also the opportunity to consolidate your existing plans without impacting the new tax year allowances. Here at OpenMoney we review existing schemes and look at what is suitable for clients.
Save for kids
The Junior ISA allowance more than doubled last tax year, so you can now pay in up to £9,000 each tax year into a cash or stocks and shares Junior ISA on behalf of a child.
If you invested the maximum each year for your little one at 5% growth a year, the pot would be worth £218,878 by the time the child reached 18, giving them an amazing start in life.
Give tax-free gifts
Nothing puts a smile on someone’s face like a wodge of cash.
You’re allowed to give away cash gifts each tax year up to the value of £3,000, and you can carry forward any unused allowance from the previous tax year, but only for one year.
You can also give as many gifts as you want worth up to £250 per person in a single tax year, as long as you haven’t used another exemption to give gifts to the same person.
Why do this? Using your tax-free allowances to give money away reduces the value of your estate, so your family gets a smaller inheritance tax bill when you die.
Use your CGT allowance
If you’ve got any assets outside an ISA, you’ll have to pay tax on any returns they make or profits if you sell them.
Luckily, though, everyone gets a capital gains tax (CGT) allowance (it’s £12,300 in the current tax year) and you only have to pay tax on anything above this amount.
At the end of the tax year, make sure you haven’t gone above this threshold, and move investments inside an ISA to avoid future tax if you can.
Use your spouse’s allowance
If you’re married or civil partnered and one of you is a high earner while the other isn’t, you can transfer the high earner’s assets into the low earner’s name to benefit from their unused personal allowance (worth £12,500) and capital gains tax allowance (worth £12,300).
This could save you a bundle in tax.
You can also use the marriage allowance to transfer £1,250 of your personal allowance to your spouse or civil partner where one of you is a non-taxpayer and the other a basic-rate taxpayer. This can save you £250 in income tax, and you can backdate it for three years.
Pay in to pensions
They may not be the most exciting thing to think about, but pensions come with loads of financial benefits. You get free money in the form of generous upfront tax relief so, for example, a basic-rate taxpayer can put away £100 and it will actually only cost them £80.
You get a pension annual allowance of £40,000 (less for high earners) every tax year, so it’s worth putting away as much as you can afford now to give it time to grow. Bear in mind though that you can’t usually touch the money until the age of 55.
Get a better rate
There are some pretty paltry interest rates available on cash ISAs at the moment - the best instant-access product available right now pays just is 0.4%, according to Moneyfacts - so the end of the tax year might be a good time to shop around for a better deal.
Remember that, with ISAs, you can’t just cash them out and move the money to your bank account or you’ll lose all the tax benefits. You need to do an official ISA transfer, but luckily it’s easy, just fill in a form and your ISA provider will do the legwork for you.
Grab free money with a LISA
If you’re aged 18 to 39, you can open a Lifetime ISA (and if you’ve already got one you can pay in to it until you’re 50). It’s a dual-purpose ISA designed to let you save for your first home and/or for retirement.
You can pay in up to £4,000 a year and get a government bonus worth 25% of everything you put in. If you need to draw money out from a LISA then you can, but there’s a 25% penalty.
Use your flexible friend
Most ISAs are now ‘flexible ISAs’, which means you can take money out and put it back in the same tax year without it affecting your ISA allowance.
This gives you more freedom to draw on your savings when you need them, and to move your money from cash to investments and back again as you wish.
If you’re planning to take cash out of your ISA this financial year, make sure you put back anything you take out before the deadline so you don’t lose any of your allowance for this year.