Tax year changes loom: 10 financial checks to protect your wealth
With the tax year-end just under two months away, it’s a good time to start thinking about how you can protect your savings and investments now, and in the future.
Given the looming changes to the UK tax landscape from April, here are 10 things to consider as we move from the end of one tax year into the start of a new one:
1) Check how much of your 2022/23 ISA allowance you have left
Every adult gets a £20,000 ISA allowance each tax year. You can’t carry over any unused allowance so consider making the most of the opportunity to shelter your investments from tax by using as much of your 2022/23 allowance as possible, before it disappears forever.
2) Check how much of your 2022/23 pension allowance you have left
Everyone can get tax relief on pension contributions, with those paying income tax able to put away a maximum £40,000 of gross relevant earnings – or 100%, if lower. This means basic rate taxpayers can save up to £32,000 of their net earnings in a pension which is topped up with £8,000 from the Government.
Higher rate taxpayers can claim back even more through their annual tax return. Unlike ISAs, pension savers can make use of carry-forward rules on unused allowances dating back three tax years (as long as you were a member of a qualifying scheme in the intervening period). As such, this could be your last chance to claim tax relief from 2019/20.
These allowances apply across all your pensions, including workplace or personal pensions, as well as self-invested personal pensions (SIPPs). So, check the contributions you’ve paid in total so far this tax-year (and in the three previous tax years) to work out how much of your allowance you still have left.
3) Are you making the most of employer pension contributions?
Under current rules, employers must pay a minimum 3% of an employee’s total earnings into a company pension, while the employee (together with tax relief) makes up the rest to reach the minimum amount of 8%.
However, some employers may match additional voluntary contributions made by the individual to their company pensions. It’s usually capped but could mean a big and free boost to your pension savings.
4) Have you considered a SIPP?
One in 11 people change jobs each year, according to data from the 2021 census. This means many people could end up with several pension pots. That’s why a SIPP can help because you can use it to consolidate all those other pensions into one place.
For those who are self-employed and therefore have no company pension or matching employer contributions, a SIPP could be an essential planning tool for later life.
Aside from the tax savings you could make on your contributions, the potential to carry-forward unused allowances means a SIPP can adapt to your circumstances as your earnings fluctuate.
5) Find old and lost pensions
Take some time out to track down those old pensions by contacting former pension providers or previous employers. You could also use the Government’s pension tracing service. According to the Pension Policy Institute, unclaimed pension pots totalled £26.6bn in 2022. This figure has risen 37% since 2018, which shows how easy it is to lose sight of pensions as jobs change. Tracking down long-forgotten pensions could make all the difference in making sure you have enough money for retirement.
6) What about your children’s investments?
Children have an annual £9,000 Junior ISA allowance. Parents and guardians can open a JISA while anyone can contribute to it. By putting money away from a young age, you could help give them a strong start to adult life or even fund them through higher education.
7) Check investment fees
Costs are something many investors tend to overlook even though they can have a major impact on their potential long-term wealth. Whether it’s the cost of the investment platform you use, the ISA or SIPP you invest through, or the funds you invest in, the differences can build into huge sums over time. So, check what you are paying and consider how much you could save by switching provider or fund manager.
8) Capital gains tax (CGT) and dividends tax warning
The amount you can earn from the sale of an investment, asset or business and not pay capital gains tax on will halve and halve again over the next couple of tax years. Dividend tax will also be cut. As such, it’s more reason to ensure your investments are sheltered from CGT and dividends tax within an ISA or pension.
That means if you have investments in a general account, it may be a good time to consider transferring these into an ISA or SIPP, while you can.
9) The inflation effect
The cost-of-living crisis could impact the amount we feel able to invest. However, if you’re tempted to cut back on your ISA or SIPP contributions, consider first the implications for your long-term financial planning and the goals you hope to fulfil. The future ‘you’ won’t thank you if you veer off course now.
If you do have some spare cash, consider whether you could up your contributions to stay on track with your goals. After all, if the present is more expensive than it used to be, so is the future. You could set up a regular ISA or SIPP payment to reinforce your discipline and average out the price at which you invest, so you’re not at the mercy of unlucky market timing.
10) Are you holding too much cash?
Cash savings rates may be rising now but shares have a stronger long-term track record of delivering above-inflation returns. If you already have an emergency cash buffer of at least three months of your outgoings, see if you could invest more of your money in stock markets.
It was a challenging time in 2022, but markets are cheaper than they have been for a long time. So much so that our economists believe the long-term outlook for investors has improved. It’s food for thought also if you have cash sitting in your investment account, as it will likely drag on your long-term portfolio returns.
Andrew Marker is head of retail pensions at Vanguard, Europe