The new tax year starts today, so it’s a great time to get your personal finances in order – starting with ensuring you’re taking advantage of all the tax reliefs and allowances you’re entitled to. After all, who wants to give more money to the taxman than is necessary? Gregor Munro of Johnston Carmichael Financial Services offers his tips on tax planning.
1 Use your Isa allowance
You can put up to £11,520 tax-free into an individual savings account (Isa) in the 2013-14 tax year, half of which – £5,760 – can go into a cash Isa. There’s also a junior Isa for those saving for children, with an annual tax-free allowance of £3,720. Any savings into an Isa are exempt from tax, which means you receive all the interest or growth with no tax due. This is the best time of year to sit down and decide what it is you would like to achieve from these investments and when you might wish to access them. Then you can start to build an appropriate investment strategy.
2 Rainy day savings
Before locking your money away in an Isa or any other savings or investment product, build up at least three to six months’ worth of salary in an easy access account. This way, you’ll always have money available in an emergency.
3 Little and often
Not everyone is fortunate enough to have large deposits, so save on a regular basis by setting up a monthly direct debit into a savings account or Isa just after you’ve been paid. This gets you in the saving mindset and builds up your savings gradually in a manageable way.
4 Watch out for penalties
Some accounts have limits on the number of withdrawals you can make and others penalise you for making withdrawals by imposing an interest penalty. They may also include a bonus but keep an eye on this, as it may drop sharply after a withdrawal is made, or after a certain length of time (usually a year).
Use collective funds such as unit trusts or investment trusts to spread your risk across different asset classes such as stocks and shares, fixed interest and property. These funds do involve some risk and you should be clear on your capacity to accept any potential short term losses should their value drop.
6 Use your CGT exemption
You can realise gains of up to £10,900 in the 2013-2014 tax year before capital gains tax (CGT) is charged on disposals at 18 per cent (if the taxable gains and income are below the basic rate limit) or 28 per cent. Married couples and civil partners can cut tax further by using each other’s spare CGT allowance.
7 Switch your investments
If you have a portfolio of investments with some gains, then consider crystallising some of these gains and immediately reinvesting them back into an Isa if you have not already used your Isa allowance for the tax year. Keep any gains within the CGT allowance for 2013-2014 of £10,900.
8 Pension contributions
If you don’t have a pension, then start making contributions into either your employer’s pension scheme or your own personal pension plan. Contributions attract 20 per cent tax relief for basic rate and non taxpayers, with higher rate taxpayers being able to claim a further 20 per cent or, in some cases, 30 per cent relief through their tax return. Your employer should also make contributions to your pension.
9 Share your allowances
Transferring any income-bearing assets to lower earning spouses can help to share the tax burden. This is particularly relevant if the spouse does not use his or her personal allowance – which has increased from £8,105 to £9,440 in this tax year – or their basic rate tax band, which is up to £32,010.
10 Tax-friendly investing
Investments such as venture capital trusts and enterprise investment schemes could sit alongside pension and Isa funds for those who may be willing to accept higher risk in return for income, capital or inheritance tax reliefs. While they potentially do not suffer the same restrictions in terms of access in the way that pension funds do, they do provide investors with an extra potential retirement strategy. These are higher risk investments and as with all investments professional advice should be taken before proceeding.