Tax year end is approaching - are you considering these key points?

It’s that time of year again. Now, more than ever, it’s important to be on top of your finances, and a review should be on your New Year’s To Do list. When it comes to tax efficient allowances – use them, or lose them.

When do we stop saying Happy New Year in January? ?

I suspect it’s about now. So, let me be the next (or the last) one to hope that 2022 bring everything you hope for. Covid-19 has been in our lives for nearly two years, and during that time there’s been so much upheaval, not only in wellbeing terms, but also our economy has taken a battering.

Which is why, dear reader, I’m going to urge you to organise a review with your financial adviser as soon as possible. And, I’ll explain why.

Whether you speak to me (call me on 0345 505 3500) or someone you’ve already engaged, doubling down on financial matters early in the year could help you move closer to your financial goals and objectives.

Why?

Because along with fast-approaching set-in-stone deadlines, there are some major changes afoot which will affect your financial health.

Note, I say will rather than might. Although this piece only expresses my opinions – I need to stress that – the money in your pocket will be impacted; either by what I see as the approaching perfect storm, or changes in legislation.

Or, perhaps both.

Use Them, Or Lose Them.

We’re zooming towards the self-assessment deadline date on 31st January. And of course, the end of the 2020/21 tax year on April 5th.

With the former, whilst your on-the-ball accountant has matters in hand, no doubt, and there’s nothing specific that you need to do right now, certain savvy investments can reduce your tax bill, including your payments on account.?

With the latter (end of tax year), as an investor you have a number of tax-efficient options. You will lose these tax allowances if you don’t use them – there are no exceptions. Don’t miss out.

Not unlike decluttering your office or home environment, a financial review could offer a simplicity and calm in an uncertain world. Information is power. Armed with a strategic plan of action, plus ongoing reviews, you’re ahead of the curve – in my view.

Let me go through where we are, and what I believe you need to know.

Cost of Living Crisis

I’m aware that we’ve touched on this issue a few times before, but it is real, and its long tentacles will reach into your life.?The latest available figures, from 15th December show that the current rate of inflation is now an uncomfortable 5.1% - as reported on the BBC. This is at a level not seen in several years, and a concern for those in the know – and all of us, to be fair.

Regarding your in-the-bank nest egg, don’t get too excited. For “standard” savings, the Bank of England base rate is just a measly?0.25%, meaning that your money is in reverse gear and that life could be getting more expensive.

Your Energy Bill

Let’s pile this on a little more. Sorry.

Last year’s dramatic increase in the cost of wholesale gas has put enormous pressure on the energy industry. Along with several of the smaller utility companies going bust, your gas and electric bills will increase sharply this Spring. Why? Because in April, when Ofgem adjusts its price cap (in this context, an ironic word if ever there was one), according to the FT we’ll be seeing rises of more than ￡700 to ￡2,000 per year for the average family. Further, costs will remain high or even go up further as we move into 2023.

What Else Should You Know?

It’s worth thinking about the following:

·????????Come April 2022, National Insurance is on the rise. From the new tax year, we’ll all pay 1.25p more per pound in NI. Those earning ￡50,000 per year, for example, will be paying an extra ￡505.

·????????For higher earners, the pensions taper allowance kicks in at annual earnings from ￡200,000. However, should your income exceed ￡300,000, the minimum annual allowance is ￡4,000. In effect, the taper allowance reduces the amount of money that can be contributed to a pension before having to pay tax.

·????????The personal tax allowance (the amount earned before tax) has been frozen at ￡12,570 until 5th April 2026, with the basic rate at ￡37,700 – also frozen. The challenge here is that for low or average rate taxpayers, income and salaries are likely to rise, this tipping over into a higher tax band.

·????????Also on the personal allowance, unfortunately, those with income of between ￡100,000 and ￡125,000, there’s a little known “sinkhole”. Otherwise referred to as the 60% trap, going over the ￡100k mark tapers away your ￡12,500 tax allowance at a rate of ￡1 for every ￡2 you earn above that amount.?Thus, you only take home ￡40 for every ￡100 of earnings between ￡100k and ￡125k.

Above ￡125,000, you lose your personal allowance entirely.

(We may be able to help you here, by enabling you to make pension contributions which reduce your taxable income, thus restoring your personal allowance. But get in touch to find out more.)

·????????Pension rules change regularly, and this year there could be developments on tax relief. Again, the message is use it, or lose it. The world of pensions can be a complicated one, which is why a review could offer the clarity you need.

More Information on Allowances

There are legal ways for you to reduce your tax bill, thus making them more “efficient”. But, you have to make sure that you claim for these before the 5th April deadline – otherwise they disappear. You can’t carry them over.

Here are the headlines:

Capital Gains Tax Allowance. You pay CGT to HMRC when you sell assets. Your tax allowance has been frozen at ￡12,300. Have you made the most of this?

ISAs. Worth mentioning for completeness, but with rock-bottom interest rates – perhaps not exactly high performing. Pay up to ￡20,000 into an ISA, with tax-free returns.

Junior ISAs. Long-term savings accounts for your children, or grandchildren, the tax-free savings allowance is ￡9,000 for the current tax year.

Stakeholder Pension Allowance. For low or non-earners, up to ￡3,600 per year can be paid into a pension, with tax relief at 20%. Don’t miss out.

So, What Are Tax Efficient Investments?

A number of capital investments can offer highly attractive tax incentives. Venture Capital Trusts enable you to invest in smaller start-up businesses whose shares are traded on the stock market. They offer potentially good returns, but should always come with a financial health warning.

Enterprise Investment Schemes and Seed Investment Schemes take things further, with yet smaller enterprises. You must take advice on all of these schemes; they are risky, so proceed with caution and expertise at all times.

In Summary

It’s possible that 2022 could be a bit bumpy.

Rising prices and sluggish interest rates, not least economic uncertainty all add up to an uncomfortable year. Or, they may do so.

I’d be pleased to help you create a clearer picture of your finances. Not just regarding hard facts and figures, but about what’s really important to you. Let’s talk about what makes you tick, what money means to you – and, where you’d like to be in 15 or 20 years’ time.

Not only can I help you to make the most of your tax-free allowances, I’d be happy to offer advice on the best, jargon-free ways to make your income work harder for you.

Here’s to your positive outlook in 2022.