With multiple ways to help ease your income tax liability, why wait until the end of a tax year to set yourself up for the next one?

Whilst it might not be possible for everyone to know their committed expenditure for the next tax year (somebody unsure of their company profits until their trading year comes to a close for example), those of you who know you will use your allowances in full every year might be better served by taking care of these at the start of the tax year rather than towards the end.

As a Chartered Financial Planner, it is not uncommon for us to receive a large portion of our tax-year sensitive requests in the weeks leading up to tax year end.  Whether the request is to top-up an existing plan or even set up a new one entirely, this not only provides a shorter amount of time to ensure the advice is suitable and delivered appropriately, but it also means the account provider has less time to process the application, complete their internal checks and apply the money to the account in time.  For these reasons, it is certainly true that the sooner you act, the better!

Let’s begin by taking a look at just some of the reasons to invest at the start of the tax year instead of towards the end:

1. A new tax year is a great excuse to set some goals you want to achieve with your savings and investments.
2. Delays can happen for many reasons and acting quickly in the tax year minimises the impact.
3. Make a head start on growing your investments in a tax-free environment early.
4. Monthly investments made at the start of a tax-year make it easier to save the maximum allowable in the smallest equal amounts. Your ISA allowance can be made with 12 payments of £1,666.66 but 11 payments would mean a monthly amount of £1,818.18, a difference of over £150 a month.
5. Gives your financial planner more time to research the recommendations and ensures the advice is suitable and meets your needs and objectives.
6. With interest rates remaining high, your savings interest on holdings with your bank could potentially push you into a higher income tax bracket or result in you losing your personal allowance of £12,570 once your total taxable income reaches over £100,000.

Aside from the practical benefits however, there are obvious financial benefits too that people need to be mindful of when making the decision on where to pay their money.

Individual Savings Accounts (ISAs)

An ISA is a financial product where the growth and income are both completely free from any tax, with a current annual allowance of £20,000.  With the completely tax-free treatment this product receives, it is a hugely efficient way of growing your wealth over the long term without having to use a portion of the plan’s growth to pay a tax bill, meaning more money in your pocket when you need it.

The two most common ISAs you can set up are a Cash ISA and a Stocks & Shares ISA. A Stocks & Shares ISA allows you to buy investment funds where a Cash ISA traditionally offers you a fixed rate of interest of guaranteed growth over a set period.  Whilst interest rates have seen highs not reached in years, history tells us that these are still out-performed by share-based investment funds.  A guaranteed return of 3% annually might sound attractive initially but with global shares returning on average 8% per year, you could be missing out on a huge amount of growth on your investments into the plan and ultimately less money when you come to withdraw it in the future.

It is important to remember that your annual ISA allowance does not carry over to the next tax-year, so any unused allowance is lost on April 6^th.

Having £20,000 spare every year however is simply not possible for all, but there are alternatives. By setting up a monthly direct debit, you can not only alleviate some of the end of tax-year rush, but it also makes it easier to factor into your monthly budget. With a total annual allowance of £20,000, your maximum monthly contribution would be £1,666.66, making this a lot more manageable for people eager to save but without the ability to pay the lump sum in one go.

Additionally, an often-over-looked benefit of monthly investing is that you can benefit from what’s known as ‘pound cost averaging’. This is where instead of buying an investment in one go at a time where it’s potentially more expensive, you can benefit from drops in the market throughout the year by purchasing at points when your chosen investment fund(s) are cheaper. With timing the market being next to impossible, this can go a long way to smoothing out the volatility within your portfolio.

Capital Gains Tax (CGT)

With some investors wanting to save more than £20,000 each year, it’s common that they could also hold a General Investment Account. Like the ISA, there is no tax paid on withdrawals from the account but unlike the ISA, attract tax on any investment growth known as the capital gains tax which falls due when an investment is sold.  Each individual has a current allowance of £3,000 (£6,000 for an account held in joint names), meaning that any growth over this amount would potentially be subject to tax.  With any growth on the investment attracting more potential tax liabilities, it can be a useful strategy to maximise this allowance sooner rather than later in the tax year.

It is always advisable to speak to your financial planner or tax adviser on these matters before making any decisions as everyone’s tax situation is unique and needs to be carefully considered.

Pension contributions

For payments into a pension from an individual, you can claim additional tax-relief on these meaning more money is paid into your pension account. Whilst this isn’t available on payments made on behalf of a limited company, these can instead be offset against your corporation tax liability.

Whilst many of us pay into pensions over the course of our lifetimes, there is an upper limit to how much can be paid in based on your salary.

Contributions into your pension used to be based on a simple percentage that took into account your age and your income.  In the present however, the question of ‘how much can I pay into my pension?’ is now met with a list of questions relating to your income and how much you have paid into your pension over the last few years.  Depending on the client’s situation, this information can be relatively complex and the subsequent calculations more time consuming.  Therefore, having this conversation at the start of the tax year allows us to start this process without fear of running into the approaching tax-year end deadline.

Unlike a General Investment Account where the tax liability falls due on the sale of an investment, a pension’s potential tax liability arises when you take income and so any growth made on your investments is tax-free.  Unlike an ISA and General Investment Account though, your pension sits outside of your estate meaning it cannot be taken into account for inheritance tax upon your passing and so by setting up your pension plan correctly, you could save your beneficiaries tax.

Again, we cannot understate how complex the area of pensions is and so advise you speak with your financial planner before making any decisions relating to your pension plan.

To ensure you are best utilising tax opportunities available to you, please contact us on 0330 320 9280, email info@cravenstreetwealth.com 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.