2022 may only have just started, but now is an excellent time to start thinking about the end of the tax year. Planning now can help you make the most of allowances and reduce how much tax you pay. Peter Banks, Independent Financial Adviser at Pembroke Financial Services, explains how.
The 2021/22 tax year will end on 5 April 2022. This date is when many tax-efficient allowances will reset. In some cases, it will be your last opportunity to use them, although which allowances should form part of your financial plan will depend on your circumstances.
Among the allowances that will reset on 5 April 2022 are:
- The ISA allowance, which allows you to save or invest up to £20,000 each tax year tax-efficiently
- The pension Annual Allowance, which is the amount you can tax-efficiently save into a pension each year
- The Dividend Allowance, which is the amount you can receive in dividends each tax year before you will need to pay tax
- The Capital Gains Tax annual exempt amount, which is the amount you can earn in profit when selling certain items before tax is due.
The end of the current tax year may seem like a long way off, but it’s worth starting to think about it now for a variety of reasons.
Take your time reviewing the allowances that will reset
If you leave your tax year planning until closer to the deadline, you may overlook some of the allowances that could be useful for you. By starting the process now, you give yourself plenty of time to review which allowances you should use. Maximising appropriate tax allowances can reduce your tax liability and help your money to go further.
Avoid being affected by delays
The end of the tax year is a busy time for financial providers, such as pension providers or accountants. If you want to make a change, leaving it until the last minute could mean you’re affected by delays and that you end up missing out. Taking steps now means you can make decisions without the pressure to do so quickly to meet deadlines.
Spread out contributions you want to make
As part of your end of tax year plan, you may want to maximise contributions to your ISA or pension. Doing so can help your money go further and help you reach long-term goals. By setting out your plans now, you can spread out these contributions over several months. It also means you have longer if you want to move illiquid into tax-efficient wrappers,”
Making tax-efficient allowances part of your financial plan
When you’re making a financial plan, you should consider the allowances that will help you reach your goals.
If you’re saving for retirement, maximising your pension Annual Allowance each year could help you save more for your future. Or considering the Capital Gains Tax annual exempt amount when planning how you’ll dispose of assets can significantly reduce your tax bill.
By embedding allowances into your wider financial plan, you’re more likely to make use of them this tax year and future ones.
While you may only just be reviewing your allowances for 2021/22, understanding the allowances for the 2022/23 year is useful too. It can give you confidence in your future, while being able to drip-feed money into an ISA or pension can also make your goals more manageable. Rather than depositing a lump sum at the end of the tax year, you can spread out your contributions to make them part of your regular outgoings.
When investing, drip-feeding can make sense too, as you’ll be buying shares or units at different points throughout the year. This can help smooth out short-term volatility.
As well as making allowances part of your plan now, you should also review them each year. Allowances can change, as can your goals, which can affect which allowances make sense for your financial plan.
If you have any questions about the allowances that could reduce your tax liability and how to make them part of your wider financial plan, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.