The 2021/22 tax year ends at midnight on 5 April 2022. At that time, all the dials get set back to zero in terms of your earnings and annual allowances.
So, it’s the ideal time to review your finances and to start planning for the new tax year.
The well-trailed “cost of living crunch” makes this even more important. Rising oil and energy prices, a National Insurance increase, together with an inflation rate expected to exceed 7% in the spring is going to put pressure on all household budgets, so taking steps to save money elsewhere is prudent.
Read on for some topical ideas as to how you can start the new tax year positively.
1. Do your tax return
A good first step to start the tax year off on the right footing is to get your 2021/22 self-assessment tax return done as soon as you can.
Getting it done early, rather than leaving it to the last minute, gives you one less thing to worry about.
It can also potentially save you money. You’ll ensure that you’re on the right tax code for the new financial year, which will ensure you aren’t paying too much to HMRC each month.
Most importantly, if you’re a higher or additional-rate taxpayer you can claim tax extra tax relief on your pension contributions.
2. Claim higher rates of tax relief
If you pay tax at the higher or additional rate, then you can claim tax relief on your pension contributions at the same rate.
Basic-rate relief is usually paid immediately – so for every £80 you contribute HMRC will automatically top this up by £20 – but you need to claim any further relief through your self-assessment tax return.
This is not only the case with any pension arrangements you set up yourself, but also many defined contribution (DC) employer-sponsored schemes.
You can also claim higher- and additional-rate tax relief for the last four tax years – so back to the 2018/19 tax year. If you’ve haven’t already done this, now’s the time.
One tip if you are claiming additional tax relief is to do it early in the new tax year following the year you’re claiming for. The sooner you get it, the sooner you can invest it and it can start working hard for you.
3. Give your pension fund a boost
As you’ve already read, the tax relief on contributions makes pensions an incredibly tax-efficient way to save money for your future.
This means that it makes sense to maximise the amount you save into your pension – subject to the maximum annual amount of £40,000 gross or 100% of your earnings, whichever is higher.
If you aren’t able to pay a lump sum at this stage, look to increase your monthly contribution. Even a small increase can have a positive long-term effect on the value of your final fund.
On top of that, even if your spouse or partner isn’t working, they are still entitled to basic-rate tax relief and can contribute a maximum of £2,880 in the 2022/23 tax year.
4. Maximise your ISA allowance
ISAs are a highly tax-efficient way to save, as you won’t pay any Income Tax or Capital Gains Tax (CGT) when you take money from your account.
As with pension contributions, the sooner you get your 2022/23 ISA contribution paid and invested, the sooner it can start working for you.
According to London Stock Exchange data, the FTSE 100 increased in value by 6.2% between the start of the 2021/22 tax year and the beginning of March 2022.
So, if you’d invested your maximum ISA allowance of £20,000 in a simple FTSE 100 tracker fund on 6 April 2021, it would have been worth around £21,240, less any charges but not including any dividend payments, on 1 March 2022.
That’s over £1,200 you’d have missed out on by delaying your investment.
Don’t forget each individual over 18 can contribute £20,000 into an ISA, regardless of earnings, so you should look to maximise your spouse or partner’s allowance as far as possible.
5. Save for your children
If you haven’t done so already, the start of the new tax year could be the ideal time to start saving money into a Junior Individual Savings Account (JISA) for your children or grandchildren.
A JISA has the same tax benefits as an adult ISA, but annual contributions are limited to £9,000 (2022/23).
You can pay into a JISA on behalf of your child up to age 18 when the account will become an adult ISA and control will pass to them.
6. Plan your income strategy for 2022/23
As well as looking to maximise the amount you save, the start of the new tax year is an appropriate time to start thinking strategically if you’re going to be taking income from the various financial arrangements you have.
By planning ahead, you can ensure you’re drawing income as tax-efficiently as possible and keeping the amount of tax you pay to a minimum.
By including your spouse or partner in your planning, it’s possible to put together an effective strategy to provide you with a substantial joint, tax-free income.
For example:
- Each individual has a CGT allowance of £12,300. You can take up to this amount as income from any assets you have, not in an ISA or pension, free from CGT. This means that you and your spouse or partner can create a joint annual tax-free income of nearly £25,000 in this way.
- Any income you take from your ISA is free from Income Tax and CGT.
- You both have a Personal Allowance of £12,570, which means you can have a combined income of over £25,000 free from Income Tax.
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If you need any help or guidance regarding your tax planning and other personal finance issues, please get in touch with us.
