The 2020/21 tax year hasn’t even finished yet, but it’s the perfect time to start thinking about the next 12 months. While this time of the year is often associated with using up allowances before the deadline, getting a head start on 2021/22 can be just as beneficial, according to Andy Knight, Chartered Financial Planner at Pembroke Financial Services.
Andy said: “The new tax year starts on April 6, with the weeks before the deadline often associated with making financial decisions to use up allowances. From moving money into an ISA, to investing through Venture Capital Trusts, using allowances can help reduce tax liability and make your money go further. In some cases, leaving decisions until the last minute can make sense, but there are reasons to set out a plan at the start of a new tax year.”
Here are six of the most important:
1. Avoid last-minute decisions
Andy noted: “Leaving your financial decisions until the last minute can mean you need to rush, which could lead to mistakes being made or not fully exploring all your options as you simply don’t have the time.”
In some cases, how you use allowances will have a significant impact on your finances. If you decided to use your pension Annual Allowance, for instance, you would not be able to withdraw this money until you reached pension age, which could be decades away. It’s important you consider how making use of allowances will affect your short- and long-term plans. Thinking about your plan for 2021/22 now means you have plenty of time to consider your options.
2. No worries about delays
Sometimes things outside of your control can have an impact on plans. Delays with providers and other parties are one example. If you decide to invest through an ISA with just a few days to go until the new tax year, there is a risk that you’ll end up missing the deadline. In some cases, that could mean paying more tax than you need to.
“Deciding how you’ll use allowances over the next 12 months means you can minimise the impact of delays or other factors that you can’t control,” Andy added.
3. Spread your contributions across the year
Andy continued: “If you plan to put a significant sum of money away, whether in an ISA, pension, or an investment portfolio, spreading out contributions across the full year can make it more manageable.”
The ISA annual allowance, for example, is £20,000. If you want to make full use of this, adding around £1,650 per month from your income or other assets can mean it becomes part of your regular outgoings rather than a lump sum you need to find at the end of the tax year.
The same is true for pension contributions. It’s also worth noting that your employer may match or increase their contributions in line with your own when it’s coming straight from your income, but are unlikely to do so if you make a one-off contribution.
4. Benefit from interest and the compounding effect
Not only can spreading out contributions make managing your finances easier, it can also be financially beneficial. If you’re using a cash account, such as a Cash ISA, you’ll receive interest on your contributions. Depositing money sooner in the tax year, whether as regular contributions or a lump sum, means you have more time to benefit from interest. The compounding effect means the longer your money is held in an account, the greater the interest it will deliver over time.
Although interest rates are low, over time the process can deliver sizeable benefits, especially if you’re making full use of allowances.
5. Drip feeding investments could make sense for your financial plan
Much like a cash account, spreading investments across the tax year or adding a lump sum at the beginning can mean you have longer to benefit from potential returns and the compounding effect. However, with investing, spreading your contributions throughout the year can also provide some protection from market volatility.
Investing regularly with smaller amounts means you’ll buy stocks and shares at different points in the market cycle. Timing the market is impossible to do consistently, so drip-feeding investments mean you’ll buy at high and low points, which can balance out over time.
6. Take the opportunity to set goals
Andy concluded: “A new tax year provides a good opportunity to review what you want to achieve in the next 12 months and beyond. It can help ensure your financial plan reflects your wider goals and will help you reach them.”
Please contact us to discuss your financial plan and the steps you should be taking in the 2021/22 tax year.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.