This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Each financial year, you are granted fresh allowances which can help you save on tax – helping your savings, income and investments to stretch further. The quieter moments of the Christmas break can be a great time to check whether you are on track to make the best of them. In this article, our financial planning team here in Padiham, Burnley offer some ideas to help you with this. Find our thoughts below, which we hope you find useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
ISA allowance
You may already know some of the benefits of an ISA. In 2021-22, you are allowed to put up to £20,000 into your ISA(s) each tax year. Any capital gains, dividends or interest generated within will be tax-free. Theoretically, this can help you build a sizeable, tax-efficient portfolio over time – e.g. £200,000 over ten years, if you use the full ISA allowance each year.
However, many people miss out on their full allowance by leaving their financial affairs until near the April deadline. At this point (6th), a new tax year starts and any unused £20,000 allowance is lost – it cannot be “carried over”. By checking your progress at Christmas, however, you still have time to maximise your ISA(s).
Young savers, for instance, may wish to get the most from their Lifetime ISA (LISA) before April. Not only are your savings and investments tax-free, but the UK government will add 25% to any contributions you make – up to a maximum of £1,000 each year. This can make a big difference to helping you towards that first home deposit.
If your ISA is largely full of cash and you have investments you wish to move inside, then it may be worthwhile speaking to your financial adviser about rearranging things. After all, most people do not get a tax-saving benefit from keeping cash in an ISA, since Basic Rate taxpayers can generate £1,000 tax-free interest in a regular savings account anyway (£500 if you are a Higher Rate taxpayer). Moreover, the interest you earn within cash ISA accounts is typically the same as most regular savings accounts.
Therefore, it may be worth moving cash out of your ISA to “make space” for you to put more into your stocks & shares ISA (assuming your ISA is flexible). For instance, suppose you put £8,000 cash into your ISA during the 2021-22 tax year. You later decide that you want to put £20,000 of investments into your ISA. Since you can currently only put in £12,000 (due to the £8,000 held in cash), you take out the cash and put this into a regular savings account – where the interest can still be made tax-free. You then move the £20,000 into your stocks & shares ISA – where it can generate capital gains and dividends without tax.
Pension allowance
There are also conditions on how much you can contribute to your pension(s) each tax year. In 2021-22, you can contribute up to £40,000 into your pension(s) – or up to 100% of your income (whichever is lower). This “annual allowance” refreshes on 6th April just like your ISA, except you can carry over any unused allowance from the previous three tax years. After this, however, any unused allowance will be lost.
As such, Christmas can be a good time to review your retirement plan and think about whether you are on-track to save enough. The aforementioned “carry over” rule means that, if you have left retirement planning late but have some large sums ready to invest, you could potentially put sizable amounts into your pension (assuming you have unused allowance from the present tax year, as well as the previous three).
Remember, pensions are a fantastic way to save for your future – especially due to the tax relief rules. These let you keep the income tax you would have paid on your contributions, instead putting it into your pension. For a Basic Rate taxpayer, therefore, 20% tax relief applies; whilst for someone on the Higher Rate, it is 40%. This can add a nice boost to your pension savings.
Capital gains and dividends
To protect shares from capital gains tax (CGT) and dividend tax, you are not just restricted to putting them into an ISA. You also have allowances for these each tax year. In 2021-22, you can generate up to £12,300 in capital gains and up to £2,000 in dividends – outside of an ISA (e.g. in a general investment account) – without these getting taxed.
At Christmas, you may wish to review your investments such as bonds, shares and property (like Buy-to-Let) and make sure you are on-track to make full use of these allowances before the April deadline. For instance, perhaps you wish to sell some funds in your general investment account and move them to your ISA. Since this will (hopefully) generate some capital gains, it may be wise to do this before the tax year starts anew – to utilise some/all of your £12,300 CGT allowance. Similarly, perhaps you may wish to sell a second property before April.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
