With the new tax year approaching, now could be a great time to start planning ahead to ensure your finances are in order. But what steps should you be taking to make the most of the new financial year? Well, it’ll all depend on your own circumstances and financial situation, but here are some things to consider.
Keep an eye on the news
New tax years are often synonymous with changes and if you want to be ahead of the game, it’s important to keep yourself informed. Typically, the government will announce new tax measures in their Budget Statement, which usually takes place in March and November, so make sure you keep an eye out for those and check the news in case there’s any tax changes.
Review your ISAs and pensions
A good way to get ahead in the new tax year is to get your finances in order – think of it as your annual spring clean. If you have old ISAs you’ve opened and paid into in previous tax years, think about bringing them into one place. Not only would this make your life a bit easier, but you could potentially find yourself with lower fees, and consequently more money at the end. Before you move your ISAs anywhere, make sure you shop around and check the different transfer rules. Transferring your old ISAs won’t impact your current ISA allowance, which means you can transfer as many as you want. However, if you’re moving your current ISA, you’ll have to transfer the full balance as it counts towards your ISA allowance. For every transfer you make, you’ll need to use the official transfer in form – this should be given to you by your new provider. Do not withdraw your money to move it or you’ll lose your ISA tax benefits.
Before the new tax year starts, it could also be a good idea to review your pensions. If you’ve got several floating around, consider consolidating them and have them under a single scheme, that way it’s easier to manage. All you need to do to transfer your pensions is locate where your pots are –but don’t worry if you can’t remember where they are, you can find them via the HMRC website: https://www.gov.uk/find-pension-contact-details. Once you know where your pensions are, you’ll need to collect your pension documents and contact the provider you want to transfer to. If you’re using a digital investment platform, like Wealthify, the hard work will be done for you – provide us with some details about your pension and we’ll do the rest, as well as managing your Plan on an ongoing basis.
Consider using your ISA allowance
You may be looking forward to the new tax year, but why wait when you can start taking control of your finances now? If you have any ISAs, remember, you’ve got until midnight on the 5th April to use your 2020/21 ISA allowance – after that, you’ll lose it forever, so consider making more payments to your ISAs, if your finances allow it. If you haven’t used any of your ISA allowance yet, then now could be a good time to start – the new tax year may be near, but it’s not too late to get the ball rolling and put some money in an ISA. Having an account open before the 6th April may encourage you to save when the new tax year arrives, and don’t forget, you’ll get a brand-new ISA allowance too on the day – it should be £20,000 this year but could change in the future.
Now, where will you be putting your money? A Cash ISA or a Stocks and Shares ISA? There’s no right or wrong answer here. With a Cash ISA, you get to save money and earn tax-free interest – what’s not to love? Well, although you’re guaranteed to make a gain, saving in a Cash ISA may not be the best option if you’re pursuing long-term growth. Let us explain, with time, things tend to become more expensive – this is what we call inflation. And if you want to enjoy real financial growth, your savings will need to grow at least at the same pace as everything else. But with low interest rates, it can be mission impossible. Every time your interest rate falls below inflation, your money isn’t actually growing and you’re effectively losing purchasing power – in other words, you won’t be able to afford as much as you could before with the same amount of money.
This is where investing can help. With a Stocks and Shares ISA, returns aren’t fixed to any interest rates. This means that there’s a risk you could end up with less than you initially put in. But that’s not all, this also means that there’s a chance for higher, inflation-beating returns. For instance, between 1983 and 2020, the FSTE 100 has returned 6.2% a year (with re-invested dividends)1. Meanwhile, between 1983 and 2020, the average inflation rate (RPI) in the UK has been just 3.4%2.
Think about your retirement
Now could be a great time to think about your later life and if you haven’t started planning for retirement yet, then why not start today? If you live in the UK and earn over £166 a week, then your company should be paying national insurance contributions for your state pension directly out of your salary – to receive any state pension, you’ll need at least 10 years’ worth of contributions and to claim the full amount, you should have a minimum of 35 qualifying years – a qualifying year is a tax year during which you’ve paid enough national insurance contributions to make that year qualify towards the Basic State Pension. In addition to this, if you’re employed, you should also be enrolled in a workplace pension, and with the new tax year coming it could be wise to check how it’s been performing and whether you’re on track with your retirement goals.
Also, if you want to boost your retirement savings, you can open a personal pension where you can make your own contributions and get a 20% tax relief from the government. This means that for every £80 contribution that you make, the government will add £20 to your pot if you’re a basic rate taxpayer – if you do the maths, £20 is 25% of £80, so you’ll effectively get a 25% uplift on your money. The total amount you can put in your pension isn’t limited per se, but the amount you’ll receive tax relief on is limited – this your pension annual allowance and it’s currently set at £40,000 per tax year, or 100% of your total income, whichever is lower. This allowance resets every 6th April and includes all contributions across all of your pensions, plus tax relief – but why wait until then to get started? The earlier you take the plunge, the more time your money will have to potentially flourish.
Don’t forget the kids
If you have kids, don’t forget to have a look at their finances before the new tax year starts. Are their savings getting the interest they deserve? If not, then you may want to have a look at other savings options. To boost their financial future, you could open a Junior Stocks and Shares ISA – it’s like a Stocks and Shares ISA but for children. You can invest up to £9,000 per tax year (subject to change) – this is your child's ISA allowance and just like your ISA allowance, they’ll get a new one on the 6th April. But that also means that if you don’t use the current one before midnight on the 5th April, it’ll be forever lost.
The good thing about having a Junior ISA is that everything you put in belongs to your child and nobody can dip into their pot, meaning their money can benefit from market movements without interruption. Once your child turns 18, they’ll get full control over their money and their Junior Stocks and Shares ISA will automatically turn into an Adult Stocks and Shares ISA, giving them the opportunity to continue their investment journey as long as they want to.
1: Data from Bloomberg
2: Data from ONS
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.