Russia’s invasion of Ukraine is a watershed moment in European politics. But it is also a turning point for the markets. As we exit two years of pandemic and find ourselves teetering on the brink of… well, who knows what exactly, there are precious few certainties to which we may cling.
Death and taxes, as the saying goes, are among the few certainties that we do have. We also know for certain that in these times of continuing volatility on the markets – while we ride out these bumps, pullbacks and corrections – we need to be taking advantage of every possible instrument, allowance and wrapper to shield our hard-earned money from the taxman.
Let’s take a look at that lowest of all hanging fruit – your ISA allowance.
Simply put, ISAs are savings or investment accounts on which you do not pay tax. There are different types of ISA available. Some give you instant access to your money and can be used for short-term management of your finances. Others are more appropriate for your longer-term savings goals.
The current ISA allowance is £20,000 and has remain unchanged since 2017. Given the soaring inflation we are currently suffering, many have argued that this ceiling should rise. For the time being, however, you can save (or indeed invest) up to £20,000 in any type of ISA… and be shielded against interest, dividends or capital gains from tax. And you have until 5 April 2022 to use it up. If you don’t use it… you lose it: you cannot carry your ISA allowance forward from one year to the next It’s as simple as that.
However, a new allowance commences on 6 April 2022: if you put £20,000 into an ISA between now and 5 April, you could deposit a further £20,000 on or after 6 April 2022. Bear in mind that you may only pay into one of each type of ISA in the same given tax year.
Cash ISAs are appropriate for short-term savings goals: they are not exposed to all the volatility of the stock market. The drawback is that a half percentage point increase in interest rates here and there will not amount to much and there is simply no way that you will be able to outrun inflation at its current rate. Cash ISAs are good places to keep your emergency money – what you might need to fix a leaky roof or enjoy a spontaneous holiday.
This is where you can invest your money in shares, bonds, property and equities, safe in the knowledge that you will not be paying any capital gains tax (or income tax) on the proceeds. Needless to say, such instruments are more appropriate for your longer-term goals – they may outperform cash ISAs over the medium to long term, but they do carry varying levels of risk. You may have seen your Stocks & Shares ISA savings take a significant hit in recent weeks – longer-term horizons are what you need to ride out such pullbacks and corrections. Paying as much as you can into a Stocks & Shares ISA, but not actually investing it (leaving it in cash) might be a wise move.
Like all savings and investment instruments, when you are choosing between a Cash ISA and a Stocks & Shares ISA, you need to consider how long you intend to save or invest, what your relationship with investment risk is… and what inflation is doing (and will be doing over time).
These were introduced in April 2016 and are designed to be used for peer-to-peer lending investments so you can receive tax-efficient interest and capital gains. Your money might be used to service personal loans, property loans or even small business loans. More often than not, it will be a combination of these. Needless to say, peer-to-peer lending is a higher-risk form of investing – although the interest rates can often be significantly more attractive than Cash ISA rates. Remember, though – your money is not protected by the Financial Services Compensation Scheme.
If you are under 39 and are saving to buy your first home, you could consider a Lifetime ISA. As is the case with a Stocks & Shares ISA, you can invest your money in a Lifetime ISA, or you can simply decide to hold cash in it. You can deposit up to £4000 each year up to the age of 50. Bear in mind that this £4000 maximum is part of your full annual ISA allowance.
The government will give you an additional £1 for every £4 that you put in, up to a maximum of £1000 per year. However, if you withdraw any money for any reason other than purchasing your first home, you will pay a 25% charge on your withdrawal.
Children have an annual allowance of £9000 per tax year. Stocks & Shares ISAs, Cash ISAs or both can be opened in their name. Their parents or guardian must open the account, and anybody can pay into it thereafter. No money may be withdrawn from a Junior ISA until the child is 18 years old. If a child owns a Child Trust Fund, then they may not hold a Junior ISA unless funds are transferred to the JISA and then the Child Trust Fund is closed.
Make a contribution to your pension. Given how high inflation currently is (and how high it is predicted to reach in the coming months), this is an excellent way of preventing the value of your money from being eroded. And since pension freedoms were introduced in 2015, they now play a key role in planning a tax-effective retirement strategy. You have an annual allowance of £40,000 (on top of a lifetime allowance of £1,073,100). Furthermore, if you get a work bonus, you may be able to put some or all of that into your workplace pension. This could save you tax as well as (in some cases) National Insurance. We can talk you through all the options available and help you maximise the tax relief on your pension savings.
Even if you have reached your own £40,000 limit, remember that you can also potentially make contributions to your partner’s or children’s pensions. Provided they are a UK resident, individuals who have no earnings can still contribute up to £3600 gross (£2880 net). Don’t forget that you may be able to use unused annual pension allowance from the previous three tax years.
And remember, if you are a high-rate taxpayer, it’s up to you to claim the relief – HMRC won’t remind you!
Also worth remembering is that the annual allowance of £40,000 may be “tapered” if your pre-tax annual income minus any pension contributions exceeds £200,000. You will then need to check to see if your adjusted income (everything on which you are taxed, including rental income, interest on any savings and dividends in addition to the value of your pension contributions) is more than £240,000. If it is, the annual allowance will be £1 less for every £2 that your adjusted income exceeds £240,000.
The new Health and Social Care Levy probably represents one of the biggest shakeups to the way in which health and social care is funded that we have seen in decades.
Leaving aside questions about the fairness of the new tax, at the crux of all of this will be increases in National Insurance contributions for both employers and employees – including employees above the state pension age. But this is just the beginning: proposals have been formulated for even wider system reform that will eventually see the integration of health and social care… and the way they are funded.
All of this is going to mean change for you – in your capacity as an employee, an employer, an investor or a pensioner. By way of an example, the government says that the change will cost £255 a year for someone earning £30,000, and £505 a year for someone on £50,000.
Don’t hesitate to bring this up with us the next time we meet with you. We can talk you through the changes in your NICs, as well as how the dividend tax increase will affect you as an investor. And if you are a business owner, we can help you work out the impact of these changes – particularly if you take dividends as well as salary.
A watertight vessel has more chance of making it across the ocean than one that has sprung a dozen leaks. Making sure that your financial planning strategy is at least seaworthy at the outset is key to ensuring that it serves you into your twilight years. Events in Eastern Europe have created more uncertainty than the world has seen in decades. So we need to use all the various allowances, exemptions and tax wrappers available to us now so as to make provision for an uncertain future. Investment Quorum does not know what the years ahead will bring, but our advisers can work with what they know today to maximise your chances of achieving your financial goals for tomorrow.
