Savers will be able to plan out their financial commitments for the months ahead as the new tax year begins and various rules are reset. While families may be broadly aware of what this means for their money, some experts have warned a few surprises could be forthcoming.
Gill Philpott, a Tax Specialist at Ascot Lloyd, broke down what tax changes could emerge this year: “Just before the budget the Treasury Committee issued a report, ‘Tax after Coronavirus’. A broad brush look at the UK tax system and its reform. A notable comment was that the current regime of pension tax reliefs is generous and ahead of the budget there was a flurry of rumours that higher and additional rate taxpayers would lose the income tax relief they enjoy on personal pension contributions.
“While this did not happen, It is time to consider if tax benefits can be achieved by making pension contributions, using current year allowances and mopping up the three prior year allowances that may be unused. Personal pension contributions provide a number of tax benefits, income tax relief on the contribution, the sheltering of funds in an inheritance tax, income tax and capital gains tax free wrapper.
“Some form of tax favoured savings vehicle, ISAs, and its predecessor, have now been around for over 30 years. A key feature is that the limit is an annual one and is lost if not used in a tax year. While the annual limit is set at relatively modest levels, currently £20,000, making regular contributions can build into sheltering a significant sum in an income tax and capital gains tax free wrapper. Unlike pensions the funds are not sheltered from inheritance tax.
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“Reform of the capital gains tax and inheritance tax regimes were also mentioned in the Treasury Committee report. This follows three reports issued to date by the Office of Tax Simplification on reform of these areas of taxation. They are almost certain to be part of the consultation process on March 23.
“”With the capital gains tax annual exemption frozen at £12,300 for five years making use of this exemption makes sense. Again, this is an annual limit that if not used in the tax year is lost. Making regular staged sales of investments rather than holding onto them over the longer term can help to move investments from a taxable environment to tax preferred investments such as ISAs and pensions and manage capital gains tax exposure.
“Intergenerational tax planning could also make use of this limit. Crystallising gains by gifting income producing assets to adult family members, passing on wealth to generate future inheritance tax savings and to enable the donee to invest to use their ISA, pension and dividend allowances to generate tax benefits.
“There are complex rules in each area which will need to be considered and before taking any action advice from a financial adviser is key as clearly tax should not be the driving factor for investment decisions. Working with a financial adviser will enable a flexible financial plan to be developed, that can adapt to your changing life needs and the changing tax environment.”
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Donald Campbell, the Managing Director at Alvarez & Marsal Taxand, added to this, warning that a wealth tax could even be on the table: “There has been recent speculation about potential changes to Capital Gains Tax and Inheritance Tax, and even an introduction of a one-off wealth tax.
“Whilst there were no material changes to these taxes in the recent Budget, it is possible that the Chancellor will revisit these areas in his Autumn Budget to help balance the Exchequer’s books.
“Now may therefore be a suitable time to review holdings or even potentially bring forward asset disposals or gifts and succession planning.”
With both expected and potential changes on the horizon, savers will need to evaluate their finances carefully and take action to prepare.
Ben Faulkner, a Director at EQ Investors, broke down some of the initial steps savers should take: “Work out what you want from life and make your money work towards that, rather than vice versa. Your priorities will naturally change over time, so taking the time to differentiate your short, medium- and long-term goals will help keep you focused and on track through the inevitable bumps in the road.
“Financial planning is all about anticipating the consequences of different choices and situations. By looking at your income, outgoings, savings and other assets, you can crunch the numbers to create a long-term projection of your finances. Identifying trends (positive or negative) can help to give you the best chance of achieving your goals and have a huge impact on how in control of your finances you are.”
Ben concluded by urging savers to “make the most” of their tax-free allowances and set up Lasting Power of Attorneys (LPA) where inheritance tax is a concern.
Al Ward, the Head of Customer Savings at Standard Life, also shared his “top tips” for how people can save money and cut costs over the coming months: “There are lots of easy ways to cut your costs – even if it’s a small amount here and there, it all adds up. The money you save, however small, could be redirected into your pension or a savings account to plan for you future. A good place to start is to consider how much money you have coming in and how much you have going out.
“If you have memberships and subscriptions, or other direct debits you never use or could live without, consider cancelling them. It is surprising how much money you can save over time from monthly payments like these.
“Commit to reviewing all the regular payments you need to make. Expensive utilities and insurance policies could be re-quoted or renegotiated to trim down some spending. Often, we forget that staying loyal to a utility provider does not always offer you the best deal, so it is wise to shop around and see if another provider could help you save.
“It’s also a good idea to check if you are eligible for any benefits through your employer, it might be cheaper, and may even mean you can stop paying for something separately, e.g. life assurance.”
For those looking to invest their money for the year ahead, Zoe Dagless, an Investment Planner at Vanguard, urged people to focus on the long-term: “Sticking to a few basic principles can help savers make the most of the tax year and set their finances on course for a successful 2021. Starting early can make a big difference. For those looking to invest, doing this at the start of the year rather than leaving it to the last minute doesn’t just save you stress – it also pays dividends. By having an extra 12 months in the market, your money has more time to grow – and as the years go by, this extra time in the market can really pay off as your investments compound over time.
“Savers should also be aware of their tax allowances. For those using an ISA to shelter their savings or investments from the taxman, there’s a £20,000 annual allowance, encompassing the various types of ISA that are available. If you’re saving for your children, there is a separate £9,000 annual allowance for Junior ISAs, which can be a great way to support your child later in their life.
“Those saving into a workplace pension are also able to take advantage of generous tax relief. High earners looking to contribute large amounts to their pension should be aware that there’s a £40,000 annual limit on pension contributions, but this can be carried forward for the previous three years, so you may be able to contribute more than this.
“Underpinning all of this, it’s crucial to keep your financial goals in mind throughout the year. By ensuring that your financial decisions fit with the targets you have in mind – whether that’s buying a house, planning for retirement or something else – you’re likely to be more disciplined and more motivated when it comes to your finances.”
In focusing on immediate issues, Kash Amini, the CEO of Maslife concluded by urging savers to review their energy bill commitments and look into fintech options.
On energy bills, Kash had the following to say: “This is my number one quick cash-saving tip. Working from home has likely pushed up all of our bills, as we use more gas and electricity in our homes than ever before. It’s easy to save money by finding a cheaper supplier. You’d be surprised – many firms actually hike their prices up for loyal customers who don’t bother shopping around. Try using a price comparison site to see how much you could save.”
Kash also urged savers to embrace the 21st century: “The fintech sector is rapidly expanding, so there is a growing range of apps designed to help people save more. Each has a slightly different offering, but do your research and you’ll be sure to find one which works for you. For example, Maslife is a first of its kind banking app which encourages wellbeing alongside good spending habits, by offering financial and wellbeing goal trackers, daily budgeting rewards and the tools to encourage healthier habits. Users can mood tag their spending, get instantly notified when they are over budget or get points and rewards for responsible spending, meditating, and exercising. “