Tax year-end: 10 Tips to make the most of your money

With tax year end approaching (5th April, 2023) there are some key steps you can take to optimise your finances. Here are 10 things to consider:

1.????Consider additional UK pension contributions

Pension contributions can be a great way to save as you get tax relief on the funds you put in.?That can save between 20-45% in tax, which is then invested in your name and could potentially grow further. Pensions also have the benefit that they are not subject to inheritance tax (IHT).

There is an annual allowance, above which your contributions will no longer benefit from tax relief. The allowance is capped at the lower of what you earn annually, or ￡40,000 (although it reduces to ￡4,000 for higher earners). You can add more than the annual allowance if you have unused allowances from three prior tax years, so it can be a good place to invest any bonuses, windfalls, or inheritances.

If you’re limited by your pension annual allowance, you can put money into your partner’s pension, allowing them to also benefit from tax relief (subject to their own annual allowance and tax rates). Even if a person doesn’t work you can add ￡2,880 to their pension. This will be grossed up to ￡3,600 (a 33% uplift), which over a decade, adds up to ￡7,200 in additional funds from tax relief.

Contributing to a partner’s pension helps keep your respective pension pot values more even so when drawdown time comes it helps tax planning aimed at reducing your overall tax burden in retirement.???

As with any investment, the value of your pension can fall as well as rise and you may not get back the full amount invested. Seek professional advice to ensure you’re making informed decisions and taking advantage of tax-efficient opportunities.

2.????Use your ￡20,000 Individual Savings Account (ISA) annual allowance

This annual allowance expires and can’t be carried over to the next tax year. So, if you let it pass without using it, it can limit your ability to tax-efficiently invest.

As tax-free investments, ISAs are one of the best savings vehicles. Tax free means there is n there is no need to draw down extra funds to pay tax, meaning you can leave more invested for longer and may get better returns.

ISAs are also accessible investments so your money isn’t locked away. There are several types of ISAs, but the two main ones are the Cash ISA (based on a fixed interest rate) and the Stocks and Shares ISA (based on a mixture of asset types). The latter is aimed at higher growth but carries more investment risk.?

For those under 18, a Junior ISA with a ￡9,000 allowance is also available.

Many of our clients top up ISAs from bonuses, vested shares, or from other taxable investments. If there is a risk of losing your 2022/23 ISA allowance, you could potentially invest in a cash ISA because it can always be converted to a Stocks and Shares ISA later

3.????Holding Cash is eroding your wealth so consider the best use

We generally advocate having 3-6 months of expenses in cash. If you have more than that, inflation will almost certainly reduce its buying power – so it is losing value. While money may feel safe from losses, inflation is a form of loss.

It is worth considering how to use this cash to receive the best value. That might be fixed interest deposit investments, paying off more of your mortgage, or adding to ISAs, pensions or other investments. All investments can be made at varying levels of risk so it doesn’t mean that it has to be a large gamble but, of course, there is always an element of risk.?For example, fixed interest deposits or paying off your mortgage are very low risk.

4.????Top up State Pension records

Depending on your circumstances, you may find your State Pension record has incomplete years or gaps (perhaps from residing overseas or a period out of work).

Normally, you can ‘buy’ up to six years of top-up contributions, to help fill out your prior history. However until April 5th 2023, you can pay to fill gaps in your contributions between tax years April 2006 and April 2016.?Once this date passes, it will revert to six years again.??

A full new State Pension will be ￡10,600 this coming financial year and will require 35 years of National Insurance record. For a couple, that’s ￡21,200, indexed for inflation for life which can cover a sizeable chunk of retirement expenses – and certainly a lot of essential expenditure.

Even if retired you may be able to make voluntary National Insurance (NI) payments to top up your record.?You may be also pay voluntary NI from overseas providing you meet certain conditions.

This tip is easy to dismiss but it would take well over ￡150,000 to ￡250,000 (double this for a couple) in savings to buy an equivalent indexed pension for life. And, once in payment, you won’t need to draw as much from your other funds meaning they can stay invested for longer and hopefully better returns.

This is now an urgent item as the window is closing.

5.????Child benefits for National Insurance credits

It is worth registering for child benefits even if your family income means you don’t receive any money. It can mean you get a National Insurance credit towards your State Pension while staying at home to bring up children.?(Also, don’t forget that if your spouse or civil partner isn’t using their annual income allowance, some can be transferred to your spouse under Marriage Allowance rules).

6.????Annual gift exemptions

We all have various gift allowances that aren’t added to our estate for inheritance tax purposes. The main one is an annual gift allowance of ￡3,000.

You can also give ￡5,000 to a child, ￡2,500 to grandchildren and ￡1,000 to any other person if they are getting married or entering a civil partnership.?

It’s best to make use of these allowances if it fits with your financial plan to pass money to others. There are other gifting rules you might also be able to benefit from.?Be sure to keep a record of the gifts for tax purposes.

7.????Business owners

You may well do this with your accountant already, but three items to revisit are:

• Employer pension contributions: they can reduce company tax as deductible and so are an efficient way to direct business earnings into personal savings.
• The structure of your remuneration: company tax rates are changing, as are income tax bands, and dividend rates have gone up.
• Dividend pay-outs: Review what dividends you want to pay yourself as the dividend allowance is changing and the change in Additional rate income bands may lead to paying the highest dividend rate so it might pay to extract retained profits this tax year.

8.????Capital Gains tax harvesting

At the moment, we all get a ￡12,300 capital gains tax free allowance that expires annually. This allowance is shrinking to ￡6,000 on April 6th 2023, and then ￡3,000 the year after. It may be worth cashing in some investments to use this allowance now, and then re-invest it to re-start the cost base of the asset (care must be taken to abide by the reinvestment rules).?Assets can be passed between spouses or civil partners with no capital gains.?That means both spouses capital gains allowances can be used to sell assets with a capital gain. That means you can make use of a potential ￡24,600 capital gains allowance in this tax year, between the two of you. That will be a total of ￡12,000 next tax year and then ￡6,000 the year after as these allowances shrink.

9.????General investment account rebalancing

Like capital gains tax harvesting, sometimes our investments that are subject to capital gains need rebalancing (e.g. changing funds to improve performance, adjusting your asset allocations). This can trigger a capital gain so it may be worth deciding if there is a tax advantage in doing it this side of April 6th 2023, given the declining capital gains allowances in forthcoming tax years.

10.?Some highly specialised investments provide tax reducers to lower your tax liability

These investments are a specialist area and are much higher risk.?They only suit a small proportion of investors and usually only as a satellite portfolio. I won’t go into detail other than let you know they exist, and professional advice is recommended.

Could any of these apply to you?

Each of these on their own may have merit. Taken together, they could have a significant impact on your finances over time. As the old saying goes: “look after the pennies and the pounds will take care of themselves”.

It does involve a lot of trade-off decisions, and questions that will be difficult to answer. For example:

• How much should I put in the pension versus an ISA?
• Should I pay off the mortgage faster – or top up my State Pension record?
• If I do all of these, what proportion of my money should go towards each?

Create a personalised financial plan

This is where a financial plan can help shape your decisions, and an annual review to calculate these steps each year can be very beneficial.?Careful financial planning over the balance of your life can help make decision-making easier and provide clarity over your finances.

Please remember the value of investments can fall as well as rise. And, because the laws relating to taxation are complex, subject to individual circumstances and is subject to changes that can’t be foreseen, it’s important to seek professional advice before you take any action. Your circumstances will be unique, so the information provided here should not be considered personal advice.?It is simplified in general so please be aware there can be specific conditions to be met that are beyond the scope of this article.

Please get in touch if you would like to discuss any of these issues with me in more detail, I’d be happy to help!