The current 2020/21 tax year will end on 5 April 2021. As a new year starts, many allowances reset. For some, it will be your last opportunity to use them.
At a glance
• It’s important to understand your financial goals and the steps you can take to make them a reality. Making the most of your tax allowances, reliefs and exemptions before the end of this tax year could help to get you there sooner.
• Tax-efficient Individual Savings Accounts (ISA) and pensions are valuable and important options to consider, wherever you are on your journey to help create a more secure financial future.
• If you’re working out how to pass on your wealth to your loved ones, think about the best ways to reduce your estate’s liability to Inheritance Tax, such as gifting money to your children or grandchildren.
Since the start of the pandemic, many of us have been experiencing a wide range of feelings. On the one hand, you may be appreciating the simpler things in life; on the other, you may be missing those ‘guilty pleasures’ we used to take for granted.
In a similar way, says Melloney Underhill, Marketing Insights Manager at St. James’s Place Wealth Management, we’re often torn between wanting to achieve our long-term financial goals by saving for the future, while also wanting to fulfil our shorter-term desires. “But there’s no need to punish yourself for feeling torn,” she says. “The best thing is to look for a balance, then put what you can into all the different areas of your life.”
To do that, she says, it’s helpful to clearly understand your goals and how you’re going to make them possible financially. “Take a step back and look for some impartiality. If you’ve thought about your goals, the bit you’re probably stuck on is whether they’re achievable, and what financial plan needs to be in place to enable them. Then you’ll be able to create your roadmap.”
Seeking expert financial advice can help with this – and there’s no better time to start than now, she says. Renewed lockdown demands restrict our ability to do lots of thing, but they do mean you’ve got more time to think about your finances. What’s more, acting before the end of the 2020/21 tax year on 5 April, and making the most of all the allowances and reliefs available to you, could go a long way to helping you reach your goals sooner.
A good starting point, she says, is to see which of the following scenarios is closest to your situation and financial aims, then think about the simple steps you can take to start moving in the right direction towards achieving them.
IF YOU’RE JUST STARTING TO BUILD A FINANCIAL FOUNDATION…
… then you’ve got time on your side to take on a little more risk than simply leaving your money in cash. The longer your money is invested, the greater the potential rewards. “Tax-efficient wrappers such as ISAs and pensions are ideal ways to begin your investment journey,” suggests Underhill. “You can put your money into a wide range of investments, which reduces your risk and broadens the opportunities for longer-term growth.”
But what’s really valuable, points out Underhill, is the potential for extra returns provided by the tax advantages of these wrappers. “Unlike assets held outside of these wrappers, you don’t pay Capital Gains Tax (CGT) on the growth, and that can make a huge difference over time.” Underhill also warns that there’s a strong possibility the government could raise CGT to bring it into line with Income Tax rates, so taking this into account now could help to reduce your tax bill in the future.
IF YOU’RE THINKING ABOUT SECURING THE FINANCIAL FUTURE FOR YOU AND YOUR FAMILY…
…don’t panic if you haven’t done much about it yet, as you’re certainly not alone. It’s human nature to want to be able to do the best for yourself and your loved ones, but it’s understandable that people often put off investing for the future as they manage today’s cashflow needs, says Underhill. That’s particularly true during these difficult times.
“But it’s never too late to begin,” she says, and points to ISAs as a great place to start, as they’re very simple and you don’t pay Income Tax or CGT on the interest or profits. “ISAs have proved incredibly popular. Over 11 million UK adults paid into an ISA in 2018/19, yet only one in four chose the Stocks & Shares ISA option1,” adds Underhill. “If ISAs are part of your plan for five to 10 years’ time or longer, there is potential to see your money grow faster in a Stocks & Shares ISA than if you held it in cash.”
IF YOU’RE THINKING ABOUT RETIRING IN STYLE…
…then you need to make the best, and most appropriate, use of all the tax-efficient savings options that are available to you, particularly when it comes to your pension and ISAs. For example, in the current tax year, the ISA allowance is £20,000. However, the annual ISA limit is per person; so, if you have a spouse or partner, you can each have an ISA and pay in anything up to that amount, thus effectively doubling the limit. You can also invest up to £9,000 in a Junior ISA on behalf of someone under 18 if you are their parent or guardian, which can go a long way towards setting them up for a more secure financial future.
Meanwhile, for a pension, you can generally pay in up to £40,000 or 100% of your earnings (whichever is lower) this tax year and claim Income Tax relief. You can also carry forward unused allowances from the past three tax years, so it’s worth using those up if you can. “ISAs are pretty straightforward, but what’s important if they’re part of your longer-term plan is that you invest your allowances wisely to make the most of the tax benefits,” suggests Underhill. “When it comes to pensions, there is a lot more to consider, and financial advice is even more critical to ensure you maximise the opportunities.”
IF YOU’RE CONSIDERING HOW TO PASS ON YOUR WEALTH…
…think about the tax-efficient options that are available to support other people in your family, both now and in the future. “Again, you need to think about the full spectrum of options available,” says Underhill, “because some have better tax implications than others.” It’s particularly important to be aware of Inheritance Tax, she says. It’s a complicated area, so it’s always worth seeking advice, but in essence, anything over the tax-free threshold (which starts at estates valued at £325,000, excluding the residence nil rate band where this applies) is taxed at a flat rate of 40%.
However, there are steps you can take now to reduce how much will be taxed. A popular choice is to start gifting money to your children and grandchildren. You can give away a total of up to £3,000 per year, thereby reducing the value of your estate. Again, contributions to a Junior ISA may be something to consider for these gifts, although it must be set up by a parent or guardian. By starting to save early, you can allow the power of compounding returns to build a child’s fund significantly over the long term.
Another option is to set up an Asset Preservation Trust, whereby the death benefits of your personal pension are paid into a trust rather than direct to a beneficiary. This removes the benefits from IHT, with the beneficiary receiving payments from the trust.
With the end of the tax year approaching, and whatever your destination, now is a good time to take a step in the right direction. Contact me before 5 April for expert guidance on how to make the most of this year’s tax-saving allowances and reliefs.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. An investment in equities does not provide the security of capital associated with a deposit account with a bank.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
1 HMRC, Individual Savings Account (ISA) Statistics, June 2020
Paul Swales DipPFS ACMA
Financial Advisor | Gregory Wealth Management LLP
1 Copperhouse Court, Caldecotte, Milton Keynes, MK7 8NL
Tel: +44 (0)1908 933896
Mobile: +44 (0)7789 877589
Gregory Wealth Management LLP is a Limited Liability Partnership registered in England and Wales
No. OC375661. Registered Office: Luminous House, 300 South Row, Milton Keynes, MK9 2FR.
The members of the LLP are Garry Gregory, James Gregory & Diane Gregory.
Gregory Wealth Management LLP is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purposes of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products