Reap benefits of being organised

Why saving earlier in the tax year will pay off later

The new tax year began on April 6 so this is the perfect time to make the most of your money – and tax breaks.

How much we can earn without paying income tax has remained the same for the 2022/23 at £12,570.

Earn over £12,570 and we pay 20% income tax on the next £37,700 we receive (that figure has also remained the same this year), and after that it is 40% on income up to £150,000. Above that, income is taxed at 45%.

In addition to income tax, we also have to pay national insurance (tax) on our earnings.

There is no national insurance payable on the first £9,880 we make (increased by £312 this year, saving us up to £41.34pa), then we pay 13.25% (an increase from 12%) up to £50,270 (which remains the same) and then 3.25% on income above that.

National insurance has increased by 1.25% at the lower end from 12% to 13.25% and at the higher end 2% to 3.25%.

This increase will be called the Health and Social Care Levy and was introduced by Rishi Sunak to help pay for the financial impact of the pandemic.

From 2023/24, it is expected to be payable as a separate tax so we should therefore expect our national insurance tax to go back to 12% and 2%.

If we sell an investment asset such as a share or a buy-to-let property and make a gain, we pay capital gains tax on any profit over our allowance (£12,300) at 10% or 20%, depending on our income and the size of the gain.

For buy-to-let properties, the capital gains tax rates are increased by an additional 8% to 18% and 28%, unchanged since last tax year. Our tax

Many people invest at the last minute, which leaves lots of money on the table

free ISA allowance remains at £20,000. You can also invest, for your children up to age 18, £9,000 into a Junior ISA and for those aged age 18 to 40 you can invest £4,000 into a Lifetime ISA and receive a 25% bonus on the contribution of up to £1,000 (LISA funds must be used to help purchase your first home up to a limit of £450,000 or go towards your retirement from age 60).

Many people leave investing into their ISAs until the last minute, but that could mean leaving thousands of pounds on the table.

Investing the full £20,000 into an ISA at the end of the tax year for 20 years at a 9% pa growth rate would produce a fund of £1,023,202.

But if you invested at the start of the tax year instead, you’d have £1,115,291 – a whopping £92,089 more, just for being organised. You continue to be able to put up to 100% of your income and taxable benefits into a pension up to a limit of £40,000 annually, which could be cut if you earn over £200,000.

If your income is below £3,600, you can still pay £2,880 into a pension and receive 25% tax relief (£720) to help save for your retirement. You can even set up a pension for a newborn baby.

It’s also beneficial to pay into your pension early: saving £2,880pa into a pension at the start of the tax year from age 21 to 66 at 9% pa produces a fund of £2,063,470, whereas leaving it to the end of the tax year produces a fund of £1,893,091. That’s an extra £170,379 just for saving early.

For more investment and financial planning ideas, search for The Money Planner podcast online.