Russia's invasion of Ukraine was a watershed moment in geopolitics. But it was also a turning point for the markets. Two years of a pandemic have given way to a Europe-wide energy crisis that has massively increased the cost of living and catapulted inflation into the stratosphere. The worst may be behind us, but in a fast-changing world, there are still precious few certainties to which we may cling.
As the saying goes, death and taxes are among the few certainties we do have. We also know for certain that in these times of continuing market volatility – while we ride out the inevitable bumps, pullbacks and corrections that will characterise the start of the current bull market – we need to be taking advantage of every possible instrument, allowance and wrapper to shield our hard-earned money from the taxman.
The end of the tax year is as good a time as any to check in with us and take stock of your circumstances. Often, even superficially minor changes can have an impact on the tax reliefs and allowances available to you. It may be a new job or a pay rise… or it may be something more substantial, such as a change in your marital status. Whatever it is, it’s worth talking to us about it.
Let’s take a look at that lowest of all hanging fruit – ensuring that your tax wrappers are properly utilised.
The best known of these are ISAs – savings or investment accounts on which you do not pay tax. And they come in a number of different hues. 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. Most likely to give you a good rate of return in a high inflation environment is, needless to say, a Stocks & Shares ISA. But you will also find Cash ISAs (good for emergency money), Innovative Finance ISAs (for peer-to-peer lending), Lifetime ISAs (if you are under 39 and saving to buy your first home) and Junior ISAs (which must be opened by a parent or guardian on behalf of their child).
The current ISA allowance is £20,000 and has remained 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 tax. And you have until 5 April 2023 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 2023: 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 2023. Bear in mind that you may only pay into one of each type of ISA in the same given tax year.
Don’t forget that if you have withdrawn any money from your ISA, you can put it back before the end of the tax year. For example, this might apply if you have taken out a large sum to fund renovation work on a property.
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).
Given how high inflation currently is, 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 allowances 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!
It is also worth remembering 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 £250,000. If it is, the annual allowance will be £1 less for every £2 that your adjusted income exceeds £250,000.
Capital gains tax is charged on the profits you make from selling an asset, such as a second property or valuable possession. The tax-free allowance is £12,300 for 2022-23, but from April this will be slashed dramatically to £6000. And from April 2024, it will be halved again to just £3000. So it really is worth your while to give some thought to your timetable for getting rid of a property or any other asset. And once again, remember that it might be expedient to send some assets across to your spouse who can sell them in his or her name.
The CGT rates that apply after the tax-free allowance will remain the same, and depend on whether you’re a basic-rate or higher-rate taxpayer.
Have a look at any losses that your portfolio may have taken. If you have made a loss on a General Investment Account, you can carry that loss and offset it against future gains. But you can only carry it forward indefinitely if you claim it within three years of the end of the tax year within which you made that loss. And you need to tell HMRC about it!
You can anticipate future tax liabilities. If you are going to be starting a new job in the next tax year, you might not necessarily want your employer to put 10% of your salary into your pension (if you have exceeded that allowance). So you might consider asking for a higher basic salary instead. That way, you can avoid the risk of over-contributing.
You still have another six weeks or so to check in with us and discuss other ways to reduce your contribution.
We can talk to you about annual gifting, for example, to reduce inheritance tax (a couple can give up to £6000 between them to their children per annum and can look back by up to a year prior to this current tax year).
Or there is Gift Aid. Even in these economically challenging times, many of our clients have generously lent their support to several commendable causes and charities. If you are a higher-rate taxpayer, you can also claim an extra 25p for every pound that you donate to charity under the Gift Aid scheme. So if you donate £100 to a charity, the charity claims Gift Aid to increase your donation to £125. You pay 40% tax, so you can personally claim back £25 (20% of £125).
For the very high earners (and the more adventurous), there are Enterprise Investment Schemes and Venture Capital Trusts. Needless to say, these come with a higher level of investment risk, but they do provide attractive tax relief. You can invest up to £1 million in an EIS and £200,000 in a venture capital trust. The maximum tax relief available is 30%.
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. The world is experiencing more uncertainty than it has seen in decades. So we need to use all the various allowances, exemptions and tax wrappers available to us now to make provisions 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.
