Show me my money! Four ways to get your finances in order before the new tax year
The financial landscape is vast, and navigating it can be a headache, especially with a lot of change. However, with inflation still eating into savings, and a bigger tax burden on individuals looming for 2025, protecting your money and making sure it is working hard enough for you has gone from a nice-to-have, to a must have. Ahead of 5 April deadline, here’s a snapshot of how savers and investors can keep more of their money.
Show me my money!
But first – where is our money going?
Firstly, inflation reduces the “real value” of your portfolio. So, your money needs to outpace this. This doesn’t just mean looking for the best cash savings rates, because despite the allure of cash rates, inflation erodes the value of cash over time. Investing in the stock market, however, gives you potential to grow your money significantly faster than inflation and savings accounts, albeit with higher risk. But, if you’re in it for the long term, your investments will have longer to recover if the market takes a dip. History tells us markets do bounce back. But more on that another time.
Secondly, the tax regime for individuals has become less generous in recent years. This is due to essentially a triple whammy of cuts to the capital gains tax (CGT) and dividend tax allowances, increases to Capital Gains Tax rates, and importantly – the freeze on the threshold at which income tax becomes payable.
This is where a piece of industry jargon, ‘fiscal drag’, is worth mentioning. This so-called ‘stealth tax’ creeps in when tax thresholds freeze as your wages rise, dragging you into a higher tax bracket. It’s the fiscal equivalent of a slow puncture; unnoticeable until your purse starts to feel deflated. In her Autumn Budget, Rachel Reeves announced that the freeze on income tax thresholds will end in 2029, which means that more of your income could be pulled into higher tax bands over the next four years.
We’re seeing wage growth in the UK, which is obviously fantastic, but the adverse effect of this is that the number of people paying the higher or additional rate of income tax has increased. In fact, it’s more than doubled, from six per cent (3.3 million) of the adult population in 2010–11 to 13% (7.4 million) now and is expected to reach 15 per cent (8.7 million) by 2028–29.
Why ISAs and SIPPs are your best tools
To keep more of your money, a good strategy is to make the most of tax wrappers and to keep your portfolio costs low (keep an eye on fees).
Whether you’re new to investing, or a seasoned pro, maximising the use of Individual Savings Accounts (ISAs) and Self-invested Personal Pensions (SIPPs) is crucial. As protective layers for your money, ISAs and SIPPs each have their own set of benefits (and make sure you’re picking the right ones for you), but investments held in these accounts will be shielded from tax, and this helps grow your money over the long term.
So, before 5 April, here are some key steps to consider:
Top up your ISA. Though few of us will be able to max out the £20,000 allowance each year, prioritise using the most of this allowance before the allowance refreshes – even if you’ve not decided how to invest it, it’s worth making the contributions. It’s use it or lose it. ISAs are effective long-term tools for your wealth, too, and can pack a serious punch over time. Any interest you earn in an ISA is tax-free, and unlike general investment accounts (GIAs), your investments in an ISA are exempt from both capital gains tax and dividend tax.
Don’t underestimate pension contributions. Unlike ISAs, you can roll over any unused allowance from the past three years and claim tax relief.
In fact, if you’re nervous about your tax bill for this year – one option could be paying a bit more into your pension. This’ll leave you with less money in your pay packet each month, and it will be tied away until retirement, but you’ll get upfront tax relief on those contributions. You’ll get an immediate 25 per cent boost in the form of a government top up and can claim back extra through self-assessment if you earn enough to pay 40 per cent or 45 per cent tax.
A self-invested personal pension, or SIPP, can be a great way to turbocharge your retirement savings, offering greater choice and flexibility. You’re still benefiting from upfront tax relief, but it also puts you in the driver’s seat from an investment perspective, which can help you feel more in control of your retirement savings. Just make sure you’re happy to make your own investment decisions.
Lastly, take a moment to review your investment platform fees – you might be surprised. Investing isn’t free, but it doesn’t have to be expensive, either. Don’t let unnecessary charges, or charges that eat into your wealth over time, undermine your tax-saving efforts.
This is for educational purposes only and should not be considered financial advice
Camilla Esmund is a senior manager at Interactive Investor (ii). ii is the UK’s second largest direct to consumer investment platform.