BUDGET changes that took effect last week offer welcome opportunities to keep hold of more of your income, writes Evan Duffus
THERE’S a fresh chance to make sure you’re not letting more of your money bolster government coffers than you need to after the new tax year dawned last week.
The 2014-15 tax year, which started on 6 April, brings renewed allowances, exemptions and reliefs – and the opportunity for some astute financial planning. Given a plethora of changes in the recent Budget, now is the ideal time to take stock of your finances and take action to improve them.
Here are some of the best ways to ensure you’re making the most of your resources in 2014-15 and not giving too much to the taxman.
Optimise your personal allowance
On 6 April the personal allowance rose to £10,000, up from £9,440 previously. The basic rate of income tax threshold has been set at £31,865 and the higher rate at £41,865.
The increased personal allowance enables taxpayers to receive more income free of tax than before. This provides a new opportunity for married couples to assess the ownership of assets, such as bank accounts and shares.
In the situation where one spouse is a higher-rate taxpayer and the other is a non-taxpayer or basic rate taxpayer, the transfer of income-bearing assets into the name of the lower-earning spouse could produce real savings. It could mean that the lower-earning spouse maximises their personal allowance whilst the higher earner potentially avoids higher-rate or even additional rate tax on the income from these assets.
Boost your tax-free savings
The new tax year marks the 15th anniversary of the individual savings account (Isa) and will be followed by a significant increase in how much you can save.
Chancellor George Osborne announced in the Budget that from July this year Isas will be simplified and the annual allowance increased to £15,000 – the biggest ever increase. The new limits represent a generous increase to £30,000 per couple.
You can start using this valuable allowance now. Regular savers, for example, could start stashing away £1,250 a month. With returns on cash still significantly less than inflation, stocks and shares offer greater long-term growth potential – provided you can tie your money up for at least the next few years.
Junior Isa and child trust fund allowances will also increase in July, by almost 10 per cent to £4,000. This is a valuable means of passing on wealth while escaping the taxman’s clutches.
Fund your personal pension
Although the new tax year brings a reduction in the annual funding allowance from £50,000 to £40,000, Osborne also announced plans to overhaul pensions.
With careful planning, the carry-forward rules are now more relevant than ever. After you have maximised this year’s annual allowance you can carry forward any unused allowance from three previous tax years. This can soak up previous allowances that were not fully utilised and receiving tax relief at your highest marginal rate.
Take your pension wisely
Osborne also unveiled plans to free savers to do what they like with their retirement savings, declaring that “no-one will have to buy an annuity” from April next year.
Income drawdown – leaving your fund invested while drawing an income from it – has been possible for many years and the restrictions on it were eased last month.
But the move to give retirees full access to their pension savings from next year could see many more people do so, and forward planning is essential.
Those approaching retirement should think now about how the changes might affect their plans: those who still want to buy an annuity should move into lower-risk assets preceding retirement; while those who want to leave their pension savings invested can afford to take more risk.
But while savers can access far more of their pension pot than ever before, there are concerns that some will squander their savings. Cashflow planning with a qualified financial planner will guide you on how much you can safely draw from your fund and ensure you never run out of money.
Evan Duffus is a financial planner at Acumen Financial Planning