GOOD intentions are rarely in short supply, but most people are running huge deficits in acting on them. As always, the lead-up to the end of the last financial year saw a last-minute flurry of activity, with people rushing to sort out their tax, pensions and Isas. Old habits die hard, but it would pay dividends to turn the 2012-13 tax year on its head and get on top of your finances now.
Although HMRC pumps out the message that tax need not be taxing, it clearly is for many of us. Unbiased.co.uk estimates that British taxpayers will waste around £12.6bn on unnecessary tax this calendar year. The labyrinthine tax code hits the poorest hardest – with £7.26bn lost in unclaimed tax credits. But most people are losing out on tax breaks: failure to make use of tax relief on pensions contributions (£2.45bn) and inefficient charitable donations (over £997m) hit the wealthier too.
Christopher Groves, a partner at Withers, suggests “with the proposed introduction of a cap on income tax reliefs due to apply from the tax year 2013/14, individuals should consider whether they should maximise their use of uncapped reliefs in the current tax year.” He notes the examples of trading losses and gift aid, and thinks people should “consider whether additional income should be triggered – for example by the payment of dividends – that can be relieved in this year, rather than in future when the reliefs will be capped.”
Jason Witcombe of Evolve Financial Planners warns people to “be aware of various tax thresholds and plan pension contributions and charitable donations around these to maximise tax breaks and make your money work harder for you.” He notes: “40 per cent tax now starts at £42,475, but there is still an effective 60 per cent tax rate for income between £100,000 and £116,210.” Witcombe also notes that child benefit is now lost from £50,000.
Sophie Dworetzsky, partner at Withers, says “don’t even think about buying UK properties through companies” in this tax year – you will now have to pay 15 per cent in stamp duty for doing so. Dworetzsky suggests “thinking about maximising pension contributions while the relief is still against 50 per cent income tax – and while you’re at it, you may want to get more income next year at 45 per cent.”
Killik’s Sarah Lord says “with the last tax year (2011/12) seeing the introduction of new rules to pension contributions – allowing an individual to carry forward any unused allowance from the previous three tax years to the current tax year and receive tax relief at their highest marginal rate – there is the potential to pay in up to £200,000 gross in the current tax year (2012/13) and receive tax relief of up to £100,000.”
JP Morgan’s Keith Evins thinks “for anyone looking to dip a toe in the water and start investing this new tax year, Isas are a great place to start – the tax benefits are well understood. It’s therefore no surprise we see a rush in the first quarter of each tax year, as people, quite sensibly, secure their annual allowance.” It pays to get on top of your Isa early: “The early bird really does catch the worm in this instance,” says Catherine Penney of Barclays Stockbrokers, “investors who use their Isa allowance from day one have the opportunity to shelter an extra year’s returns from tax, compared to someone who chooses to invest on the last day of the tax year.”
Tim Cockerill of Rowan Dartington notes that “within an Isa any tax paid on a fixed interest fund can be reclaimed”. As such, he says this is particularly good for any taxpayer – but especially higher and additional rate taxpayers – who can save a considerable amount, especially as many people are protecting over £100,000.
Cockerill says that if in this new tax year you are going to retire, or your income is going to drop, then re-arranging your Isa investments to ensure that your fixed interest holdings are in your Isa makes a great deal of sense: “Lots of investors don’t do this and many IFAs may need a nudge too to ensure they maximise their client’s tax position. And even if you aren’t retiring it still makes sense.” If you have £100,000 sheltering under Isas generating 5 per cent income via fixed interest funds, you will generate £5,000 income. However, outside of an Isa a higher rate taxpayer would receive £3,000, and even a basic rate taxpayer loses £1,000 in tax.
If you don’t have £11,280 to hand, regular monthly savings are the best way to build up your Isa pot over the year – plus you benefit from pound-cost-averaging – potentially paying less than the average price.
If one day a year you put your finances first, make it near the start of the tax year – not a scramble towards the end of it.