WANT TO HOLD ON TO MORE OF YOUR HARD-EARNED CASH BEFORE THE NEW TAX YEAR STARTS? VICKY SHAW FINDS OUT HOW
THE current tax year end – April 5 – is fast approaching. But with the new tax year starting on April 6, there’s still time to take advantage of opportunities that will make your money work harder for you.
Restrictions around the pandemic mean some people will have spent much less during the 2020/21 tax year than they normally would.
While many people have seen finances devastated by the impact of the pandemic, a recent Financial Conduct Authority (FCA) report found that 48% of adults have not been affected financially by Covid19 and one in seven (14%) have actually seen an improvement in their situation.
The new tax year will bring new allowances, so those lucky enough to have surplus savings may want to make the most of those still available to them in the 2020/21 tax year.
Here, Laura Laidlaw, head of customer savings at Standard Life, offers some tips on what to do with any money and spare savings before the tax year comes to a close...
ISA ALLOWANCE – USE IT OR LOSE IT
With a new tax year comes a new set of annual allowances, or in other words, the limit on how much you can save into an Isa while still benefiting from tax breaks.
Currently, you can save up to £4,000 in a Lifetime Isa and £20,000 in other Isa products tax-free in any tax year, making Isas a tax-efficient option for any extra savings that some people may have acquired during the lockdowns.
PICK THE RIGHT ISA FOR YOU
With several different Isas available, it’s important to know which one is right for you, especially if you are considering putting a significant sum of money away ahead of the new tax year.
Cash Isas, which can be accessed easily, can be handy places to keep an emergency fund if something goes wrong, such as a boiler breakdown.
And Lifetime Isas come with a bonus and could be useful for those saving for their first home.
Stocks and shares Isas, meanwhile, may be useful for longerterm goals. They may potentially secure savers better returns for their money at a time when interest rates are at an all-time low.
However, this option involves actively investing, so those considering it need to be aware that it comes with a level of risk. The value of investments can fluctuate.
Remember, the £20,000 limit applies to the total amount that can be saved into Isas, across the different types, in the current tax year.
Before choosing any option, it’s wise to make sure you have some money set aside in an account that can be easily accessed, just in case, whether it’s in an Isa or elsewhere.
GIVE YOUR PENSION A LITTLE LOVE
Even if retirement seems far away, increasing your pension contributions as you approach the tax year end could pay dividends to your future. Much like your Isa allowance, you will also have an annual allowance on how much you can pay into your pension. This is generally capped at £40,000, or 100% of your earnings, whichever is lower.
If you have any extra savings to put away, you could consider setting up a private pension or upping any workplace contributions to redirect some of that additional money into your pension.
Even small boosts to your pension plan can go a long way.
Some firms will offer salary sacrifice schemes. Under some schemes, employees agree to reduce their earnings by a sum which equals their pension contributions.
The employer, meanwhile, agrees to pay the amounts sacrificed as pension contributions.
There are potential tax benefits to salary sacrifice schemes, however taking part could also affect financial applications such if you need a mortgage, for example, as the employee’s earnings will be less.
BE SAVVY WITH YOUR BONUS
In the current climate, there may be fewer or smaller bonuses this year. However, for those lucky enough to still be receiving one, it may coincide with the tax year end.
This timing can sometimes be tricky when it comes to tax planning at tax year end. For some, the extra money means they are pushed into a higher tax bracket, which could mean allowances and benefits are lost.
If they don’t immediately need the bonus cash, some people may want to consider redirecting any bonus payments into their pension, whether this is by setting up a private pension or asking their employer to direct it into their workplace pension.
Cash Isas, which can be accessed easily, can be handy places to keep an emergency fund if something goes wrong Laura Laidlaw