The budget came as a relief to many of us who were convinced that the Chancellor was going to impose dramatic tax increases.
But in fact, he did impose some tax hikes, although he did so by stealth. By freezing several tax allowances, he actually ensured that we would be paying more tax as inflation kicks in with the recovery.
With the new tax year coming into play on Tuesday, making the most of those allowances will be more important than ever. At Continuum we are looking at why you might want to act now to do just that.
Why act now?
Three key allowances – ISA, Savings and Pensions – last a whole tax year. But you could be better off if you don’t wait to use them.
It is a simple fact of finance; the sooner you invest, the better off you may be. The sooner your cash is working for you, the more time, and the greater potential it has to grow. Delaying means missing out on time for growth.
Time really is money. Invest at the beginning of the tax year rather than the end and you have a whole extra year of growth to enjoy. This is true every year – but particularly in the current climate with recovery on the way.
Use all your ISA allowance as soon as possible
ISAs are a rare example of the taxman’s generosity. They are exempt from income tax and capital gains tax, even when you come to withdraw your cash.
The ISA allowance for the new tax year is £20,000, and is available from 6th April 2021 until 5th April 2022. But there is a simple reason to not wait until 2022. The sooner your cash is invested, the more time, and the greater potential it has to grow.
It could mean an extra year of growth for your wealth.
Even if you do not have a spare £20,000 (or £40,000 as a couple) laying around, it makes sense to invest whatever you can as soon as possible, and get the full performance of the stock market behind its growth. You can top up your investment later in the year if you wish – and with some ISA funds, you can invest regularly, on a monthly basis.
There are many ISAs to choose from, ranging from Cash ISAs, which now have such poor interest rates that your money will scarcely keep up with inflation to Stocks and Shares ISAs. These carry a little extra risk, but a great deal more potential for profits, especially in light of the recovery.
You might find it a little easier if you can call on the expertise of the Continuum team to find the right ISA for you.
What about your Personal Savings Allowance (PSA)?
The PSA means that most savers no longer have to pay income tax on the interest their savings earn.
Your PSA depends on which income tax band you are in. Basic rate taxpayers are entitled to a £1,000 allowance. Higher rate taxpayers receive a £500 allowance. Additional rate taxpayers have no PSA and must pay tax on all the interest their savings earn.
Again, the sooner your cash is in a savings account, the longer it will have to attract interest. Investing on April 6th this year will mean another year of potential growth.
However, although savings will grow faster with no tax deducted, the current low rates mean that growth will be slow. If you are in the unusual position of being a basic rate taxpayer who has used up their ISA allowance and still has cash to save, you could make full use of your savings allowance – but to do so with current savings rates (where 0.5% is considered good) you would need to have a cash nest egg of £200,000. There might be better ways to use that kind of wealth.
At Continuum we can help you discover the most rewarding ways to use your cash savings
With the taxman’s generosity, your pension may be one of the best investments you’ll ever make. Every pound you put in becomes £1.25 (if you are a basic rate taxpayer), and all of that £1.25 is invested for you.
The pension annual allowance for tax year 2020/21 and 2021/22 is £40,000, or the value of your whole earnings – whichever is the lower.
If your pension is invested for growth, making the full contribution now at the beginning of the tax year could mean an extra year of growth for this year’s contribution.
The rules on allowances are clear – but there are many ways to use them. At Continuum we can help you use them as a part of an integrated financial strategy, designed to help you make the most of all your money.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change.
The Financial Conduct authority does not regulate taxation advice.