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The early bird catches the worm!

There are many ways to help reduce your income tax bill ahead of 5th April each year, but why leave this until the last minute when there could be valuable savings to be made far earlier in the tax year?

Of course, there are certain circumstances when tax planning is not possible at the beginning of the tax year.  For example, you may not know your company profits until your trading year draws closer.  However, if you intend to use your allowances each year then why not ensure that this is actioned at the start of the tax year rather than towards the end?

As a Chartered Financial Planner, I often receive phone calls in the two weeks before 5th April from clients wanting to open a pension or an ISA and make a contribution before the tax year deadline.  Most people know that the tax year end falls on 5th April, but this does not always fall true in reality as some pension and investment providers have their own cut-off dates for receiving payments – especially by bank transfer which is a popular method of payment in recent years.  This is so they can carry out their own internal checks, process and apply the contributions in time.  So, to avoid any disappointment you should act sooner rather than later.

That’s the practical side over with, let’s think about the financial benefit….

Individual Savings Accounts (ISAs)

In a nutshell you can save £20,000 into an ISA and HMRC do not request for this to be reported on your tax return.  This means that any capital growth or income is completely free from tax.  If you want to grow your wealth efficiently over the longer term a stocks and shares ISA is probably the best place to start.  As your investment grows in value, the profit is protected from the taxman and you benefit from tax free returns for longer.

Even with the recent rises in banking interest rates, history tells us that share based funds have outperformed the current interest rates.  You could obtain 3% interest on a Cash ISA but why cap your return at this when inflation is at a record high?  Over the last ten years global shares have returned 8% annually.

If you do not use your ISA allowance in a tax year the opportunity is lost, so timing is important.

We appreciate that not everyone has £20,000 to hand in April every year so a solution could be to make monthly contributions to your ISA.  The maximum monthly amount is £1,666.66 and a regular direct debit mandate could solve the end of tax year panic.  By drip-feeding monthly payments into your stocks and shares ISA you could also benefit from buying into the markets at different points throughout the year – this is known as ‘pound cost averaging’.  It is impossible to time the market so managing your savings this way could smooth out the volatility in your investment portfolio.

Capital Gains Tax

Given the annual subscription of £20,000 allowable into ISAs, many investors also have a General Investment Account.  Any sales from these types of accounts could generate a chargeable gain for capital gains tax purposes however each individual has a capital gains tax allowance of £6,000 (2023/24 tax year) so it might be unlikely that this would be maximised by making sales to fund ISAs however it is possible.  It is advisable to execute this at the beginning of the tax year as any further growth throughout the year could add to your capital gains tax liability.

We would always suggest that you speak to your financial adviser or tax adviser regarding capital gains tax as this area is extensive.

Pension contributions

Personal payments into pensions are relievable for income tax purposes.

Payments into pensions from your limited company can be offset against your corporation tax liability.

These valuable tax savings mean that many of us pay into pensions throughout our lifetime however there are upper limits to the amounts which can be paid in (without a charge to tax) and this changes depending on who is making the payment i.e. company funded, personally or third party.

When I started working in the financial planning industry the calculation of how much you could pay into a pension was simple as it was a percentage based on age and income.  Now, when a client calls me to ask what they can pay into their pension I need to ask them a long list of questions in relation to their income and last four years’ pension input to enable me to carry out a complicated and time consuming calculation.  For this reason, it is wise to start thinking about making pension contributions earlier in the tax year or allow your adviser plenty of time to complete those calculations.

From a tax and investment perspective, pensions are not subject to capital gains tax so it is best to make a contribution earlier in the tax year to benefit from this tax free growth.  Pensions are also held outside of your Estate for inheritance tax purposes so making a payment earlier could save your beneficiaries some tax in the event of your death.

Again, I would suggest that you speak with your independent financial adviser before making any payments into pensions as this is a complex area with upper limits and restrictions which you should be aware of.

Reasons to start saving on 6th April…

  1. Take the opportunity to set yourself financial goals for the year
  2. Avoid any last minute decisions and delays caused by your pension or investment company
  3. Benefit from tax efficient capital growth earlier
  4. Monthly investments can be more manageable and reduce the end of year panic to find a lump sum to invest
  5. Give your financial planner plenty of notice to provide you with full financial advice which enables you to meet your needs and objectives
  6. With the rises in interest rates this planning is more apparent. Your bank interest could take you into the higher rate income tax bracket or result in you starting to lose your £12,570 personal allowance once your total taxable income reaches £100,000 plus.

To ensure you are best utilising tax opportunities available to you, please contact us on 0330 320 9280, email or complete our online enquiry form.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority.

Kim Williams
Financial Planning Director
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