How to maximize your tax planning to your financial benefit
What does January typically entail? New Years resolutions, and how well we can stick to them. Whether that’s to quit smoking, run a marathon or simply go outside more. We all have our different goals that we look to begin on in January. At True Advice, we want to look at some new years tax saving resolutions that can help you make the most out of your money. After all, you work hard enough to earn it, so it’s best to then make the most of it.
Not wanting the tax man to take all of your hard earned money is a shared view of most people. Being savvy with your earnings goes a long way to making sure that you are able to keep and grow your own finances to the point of eventual financial freedom, if you so choose. Let’s look at some of the more specific ways you can save on tax pounds this new year.
The looming independent saving account (ISA) deadline
You can use ISAs to reduce the amount of tax you pay on your hard-earned money. Some ISAs provide you immediate access to your money and can be used to make short-term financial plans. If you have longer-term savings goals, on the other hand, you can put money into an ISA.
The ISA ‘annual allowance’ is the maximum amount you can put into an ISA each tax year. Your ISA yearly allocation for the 2021/22 tax year is £20,000, and you have until midnight on April 5, 2022 to utilise it. If you don’t use your ISA allowance, it will expire and you won’t be able to carry it forward.
However, starting on April 6, 2022, for the 2022/23 tax year, you will have a new annual ISA allowance of £20,000, so if you placed £20,000 into an ISA in the previous tax year, you can put another £20,000 into an ISA on or after April 6, 2022. You can only pay into one of each type of ISA in a tax year, within the ISA annual allowance. This would either be a cash ISA, stocks & shares ISA, innovative finance ISA, lifetime ISA or a junior ISA. All of which have individual pros and cons. Using this allowance is a great way to kick off your new years tax saving resolutions.
Investing your capital to protect from inflation
Low interest rates and excessive inflation have a negative impact on many people’s cash holdings. Even if the Bank of England (BoE) moves to raise interest rates further in the next months, a prolonged period of low interest rates on cash deposits and rising inflation might represent a serious risk to savers in 2022.
Because of the danger of greater inflation throughout 2022, savers with substantial sums of money sitting in cash should not be lulled into a false feeling of security if interest rates rise. The negative impacts of high and growing inflation will almost certainly wipe out any increase in the value of cash saved that a higher interest rate would provide. Currently, 8.6 million people have more than £10k in cash to invest. Reviewing your current cash position is key to new years tax saving resolutions.
For people with huge sums of money in cash savings, the prospect of inflation this year and beyond could far outweigh any slight improvements in interest rates. People may have forgotten how destructive high inflation can be after years of low inflation.
However, savers should consider carefully about where they place any extra cash that is not needed in the near future in the next months and years. If you have money left over after your emergency fund, you should consider investing, which has the potential to outperform inflation.
Maximising your pension contributions
For the years 2021/22, the annual pension contribution allowance is £40,000.
To avoid paying an annual allowance tax penalty, your pension contributions, as well as those made on your behalf by your employer, must be covered by your available annual allowance. If you haven’t used all of your allowances in the last three tax years, you may be able to contribute more to your pension plan by ‘carrying forward’ any remaining allowance to take advantage of the tax relief available, though keep in mind that your personal tax-relievable contribution amount is still capped at 100% of your earnings.
If you’ve already started taking money flexibly out of your pension plan and are affected by the Money Purchase Annual Allowance, or if your income after adding your employer’s payments is more than £240,000 and your income after subtracting your own contributions is more than £200,000, different rules apply.
Utilising a professional financial adviser
Every case is unique. You will have different new years tax saving resolutions to the next person. Some of the above may apply to you, some won’t. Each individual situation is different and requires experienced advice. That is where we come in to advise you. Get in touch with us today to discuss your finances and how we can assist you.
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