This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult our financial planning team here at Vesta Wealth Limited in Cumbria, Teesside and across the North of England.
Few people jump at the thought of sorting through their taxes, but it certainly feels good to make the most of your tax allowances after some careful planning. Here at Vesta Wealth, we have recently helped clients organise their tax planning before the April 5th deadline (when the tax year ends). However, some missed out on attractive tax allowances by leaving it too late and expressed regret over not sorting through it all earlier. The good news, however, is that by planning ahead now, you can make the most of the allowances available for the 2020-21 financial year.
We offer this short guide, outlining some ideas and information about how to take full advantage of your allowances in 2020-21. If you would like to discuss any of these areas with your financial adviser, then contact us:
t: 01228 210 137
e: [email protected]
Mastering your ISA(s)
In 2020-21, you are allowed to save up to £20,000 per tax year into your Individual Savings Accounts (ISAs). The most powerful aspect of ISAs, is that any interest earned on your savings is free from tax. Furthermore, if you accrue dividend income or capital gains from your ISA investments these are also tax-free. This opens up the possibility for people to build up a significant, tax-free portfolio of savings and investments. Consider, for instance, that if you committed the maximum £20,000 per year over one decade, then (assuming the ISA rule don’t change) you could accrue a tax-free portfolio of £200,000, even before any investment growth is taken into consideration.
The challenge for many people, however, lies in the fact that April represents the ’cut off’ point for you to take full advantage of your £20,000 ISA allowance. Once the financial year is over, in other words, you cannot ’carry forward’ any unused ISA allowance from the previous year to the next one. It is simply wiped out, and the opportunity is gone.
As the 2019-20 tax year end approached, many of our financial advisers witnessed people struggling to gather the assets they needed, at the last minute, to take full advantage of their ISA allowances. By planning ahead now, however, you can give yourself many months to get your affairs in order, building up your ISA savings and investments gradually.
Get the most out of your pension
Did you know that, over a decade ago, you used to be able to put £255,000 per year into your pension? Today in 2020-21, however, the pension annual allowance rules limit an individual’s contributions to £40,000 per year; or up to 100% of your earnings (whichever is lower). This often places restrictions on an individual’s retirement planning. Selling a business, for instance, and putting all the proceeds into a pension all at once is likely to encounter problems. A similar situation can arise following the sale of a second home, or downsizing.
The good news, however, is that there is more ’carry forward’ flexibility with unused pension allowances compared to ISAs. In 2020-21, you are allowed to take advantage of any unused allowances from the previous three tax years. For example, if you did not use £20,000 of your annual allowance during this time, then you can add this to your £40,000 allowance for the 2020-21 tax year (assuming you meet the criteria) to total £60,000.
However, despite this added flexibility, it’s still important to take full advantage of the allowance for each tax year, where possible. After all, each passing tax year represents the cut-off point for using any unused allowance from three years ago. A pension, moreover, still offers significant advantages over most other saving plans here in the UK. Under 2020-21 pension rules, you can receive tax relief on your pension contributions, equivalent to your highest rate of income tax. For a Basic Rate taxpayer, therefore, it only ’costs’ you 80p to make a £1 pension contribution (due to your 20% tax rate). For Higher Rate taxpayers, it only costs 60p.
Conclusion & invitation
It’s never too early to plan ahead with your ISA, pension and wider tax strategy. It typically results in greater peace of mind, knowing your wealth is optimally organised, and it also tends to lead to greater tax savings in both the short and longer term. Consider speaking with a professional, local financial adviser to take full advantage of the allowances on offer, especially if you have cash or assets now which might take time to plan properly.
If you are interested in starting a conversation about your financial plans, then we’d love to hear from you. Get in touch with a member of our financial planning team here at Vesta Wealth in Cumbria, Teesside and across the North of England. Reach us via:
t: 01228 210 137
e: [email protected]