Financial Spring Cleaning
Sunday 20th March marks the first day of spring 2022, and with it the opportunity to freshen up your finances before the new tax year on 6th April.
Allowances: Use them or lose them
Everyone in the UK has a certain level of tax-free allowances to use within each tax year and failing to utilise each one is costing taxpayers thousands which could otherwise be avoided.
Many are familiar with an individual savings account (ISA) and tend to opt for the cash ISA route, rather than investing via the stocks and shares option. It doesn’t need to be an either/or choice, but having a well-diversified investment portfolio with exposure to stocks and shares could result in better long term growth. It is well worth reviewing the performance of your cash ISAs against the current level of inflation (CPI 5.4% as at January 22), as it is very likely that you could be receiving a negative real return (the return you receive after inflation is taken into account).
Additionally, if Covid related restrictions have left you with excess savings, it is important to review your personal objectives and it may be appropriate for you to utilise your £20,000 annual ISA tax year allowance before April arrives.
Capital Gains Tax is another way in which HMRC apply a levy on sale proceeds from assets held outside the wrapper of an ISA or pension. However, they do allow you to make profits of up to £12,300 before you’ll pay any CGT. Remember though, the Chancellor announced last year that this allowance has been frozen until 2026, and if you don’t use it - you lose it!
It is always worthwhile reviewing your portfolio before the tax year end to look at realising profits to utilise this allowance. These proceeds could then be re-invested*.
Effectively ‘free money’ from the government in the form of tax relief, no inheritance tax, income flexibility, tax free cash…what’s not to love? The planning opportunities pensions offer us as financial advisors are profound and add real value to our clients. Yet many individuals miss out on the benefits available through their pensions, opting to pay a higher tax bill rather than contributing to their ultimate retirement fund. A wide expectation is that the government will look after us in retirement via the state pension, yet the reality is that for most this won’t be enough. It is important to understand your personal annual pension allowance which could be up to £40,000 per tax year. If you go over your annual allowance limit, you’ll normally have to pay tax on the excess – but in some cases you can carry forward any unused annual allowance from the previous three tax years, which may reduce the tax charge.
Employer pension contributions are an allowable business expense which means that your company could receive tax relief against corporation tax. As a director of a limited company, it is definitely worth considering making pension contributions to extract funds from the business tax efficiently.
If you’d like us to provide assistance, want to know more or would like to arrange a no-fee initial meeting, please get in touch with our wealth management team.
*subject to the bed and breakfasting rules
Past performance is no guarantee of future performance; and the value and income derived from investments can go down as well as up.
For further information and guidance, please don't hesitate to contact us to the right of this page.
Written February 2022.