Are you making the most of your finances?

Keeping your tax bill to a minimum is not a matter of aggressive or complex tax schemes

During this period of austerity, why pay more tax than you need to? Sensible tax planning is an essential tool in making the most of your finances. Keeping your tax bill to a minimum is not a matter of aggressive or complex tax schemes, but rather of identifying which of the many tax reliefs and allowances specifically granted by law are available to you.

Here are some ways to help you keep hold of more of your hard-earned money:

Check your tax code
If applicable, look at your pay slip or ask your tax office for a coding notice. This details your allowances and any deductions due to state benefits or taxable employee benefits. If you’re not sure it’s accurate, query it. Errors will affect how much you pay and may result in a large tax demand if you’re paying too little. You may be paying too much if, say, you change jobs and your correct tax code isn’t used – or if you have more than one job. You can claim back overpaid tax for up to four years.

Maximise personal allowances
Ensure that you are making the most of your individual tax-free personal allowance (PA), which for 2013/14 is £9,440 for those aged under 
65, or the age-related allowances which are worth up to £10,660 assuming your maximum income doesn’t exceed £26,100, after which your PA would reduce by £1 for each £2 earned above this figure, until it reached £9,440.
If your spouse or registered civil partner has little or no income, consider transferring income (or income-producing assets) to them to ensure that they are able to make full use of their PA. Care should be taken to avoid falling foul of the settlements legislation governing ‘income shifting’. Any transfer must be an outright gift with ‘no strings attached’.

Make the most of your Individual Savings Account (ISA) allowance
Up to £11,520 can be invested in an ISA this tax year, of which up to £5,760 can be invested in a Cash ISA. Most income accrues tax-free, although the tax credit on UK dividend income cannot be recovered.

All investments held in ISAs are free of CGT. And don’t forget, the new Junior ISA (JISA), for those aged under 18 who do not have a Child Trust Fund account, allows investment of up to £3,720 in 2013/14. 16 to 17-year-olds can also invest up to £5,760 in an adult Cash ISA, even if they already have a JISA.

Use your capital gains tax (CGT) allowance
Make the most of your CGT exemption limit each year (£10,900 in 2013/14). It may be possible to transfer assets to a spouse or registered civil partner, or hold them in joint names prior to any sale to make full use of exemptions. Individuals with a particularly large gain may want to realise it gradually to take full advantage of more than one tax year’s allowance. (You should only consider spreading a disposal of, for example, shares if you will not be putting your gain at risk in the meantime.)

Use your occupational pension scheme
Opting out of your occupational pension scheme could mean that you are missing out on valuable pension contributions from your employer. If you are offered a pension scheme by your employer, then it is worth considering joining. If your employer makes a contribution to your pension, this is like receiving additional pay. Some employers may even be willing to match the contributions that you make, doubling the amount saved towards your retirement.

Get a tax boost for your pension contributions
If you’re a UK taxpayer, in the current 2013/14 tax year you’ll receive tax relief on pension contributions of up to 100 per cent of your earnings or a £50,000 annual allowance, whichever is lower. For example, 
if you earn £60,000 and want to put that amount in your pension scheme in a single year, you’ll only get tax relief on £50,000. Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years. The annual allowance is reducing from £50,000 to 
£40,000 in the tax year 2014/15.

Non-taxpayer? Don’t pay tax at source on your savings
As a non-taxpayer, you can pay too much tax on your savings, as tax on interest is deducted at source. If this has happened, complete an R40 Tax Repayment Form for each year you’ve paid too much. A form R85 from your building society or bank will stop future interest being taxed. Often non-taxpayers fail either to elect to have interest paid gross or to reclaim any overpayment from HMRC. This could result in you paying unnecessary tax and reduces the value of your savings.

Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

Yo-yoeffect

Why so many of us are financially uncertain

Almost half (47%) of Britons are up and down when it comes to money, making shrewd savings one moment to justify overspending the next, according to research from Standard Life by YouGov Plc.

The survey finds that almost half of people in Great Britain take a 5:2 diet approach to their personal finances – they adopt shrewd money-saving tactics simply to offset overspending sprees.

People most likely to take this yo-yo approach are those aged 55 or over (51%) and 18–24 year olds (48%), while 25–34 year olds are least likely, although 43% of them still ‘yo-yo’ about. Notably, those with most control of their spending and saving are adults with three or more children living in their household (41%).

Controlled spending
Looking across Britain, people in Wales (57%) and the West Midlands (53%) are the most likely to yo-yo about with their money, while people in the North East are the least likely – but 42% of them still manage their finances like a 5:2 dieter.

Knowing that so many Britons are up and down when it comes to money is slightly worrying. But it’s also encouraging to know that these same people can be shrewd cost cutters when they want to be. They just need to channel that smart behaviour so they build up a savings pot, rather than just bankroll a spending spree – that way, they can enjoy controlled spending and don’t have to feel guilty or anxious. Families certainly seem to be doing their best to avoid the financial uncertainty of the up and down of the yo-yo approach.

Recognising the challenge of ‘saving smart’ for long-term savings, such as in a pension or ISA, is important. Here are some top tips:

1. Money sitting in a savings account is likely to be losing real value, so think about checking the rates you are getting on your savings, and if you’re not already doing so, you might consider an alternative tax-efficient option such as a Stocks & Shares ISA.

2. If you’re employed, you might be automatically enrolled into a workplace pension. If you’re tempted to opt out of this, think very carefully before missing out on ‘free money’ from your employer’s contributions and generous tax benefits from the Government too.

., If you are self-employed, then you need to make your own pension arrangements. That’s something to factor into your plans when starting your own business.

4. If you have several different pensions, you might want to consider bringing them together into one. It could make it all a lot easier, so you only have to deal with one company and can see more clearly how your pension is doing – it will be less paperwork too. However, it’s not right for everyone and doesn’t guarantee a better pension. For example, you could be giving up valuable guarantees.

5. The earlier you start investing for your future, the more chance your money has to grow. If you are concerned about locking your money into a pension until you reach age 55, then tax-efficient ISAs could be considered as an alternative in the meantime.

6. Use as much of your ISA allowance as possible each tax year. From 1 July 2014, new ISA (NISA) rules apply, and you now have the chance of greater tax-efficient growth over the longer term by being able to invest up to £15,000 in the 2014/15 tax year.

7. Consider holding some money in cash to cover your outgoings (such as your rent, mortgage, food and utilities) and in case of emergencies, before looking to invest for the longer term. But make sure you are getting the best interest rate on your cash, and be wary of holding lots more money in cash than you need to – you could be investing some of it instead and giving it the potential for long-term growth in the stock market.

8. If you are dipping your toe in the stock market for the first time, then you may want to seek guidance when it comes to choosing which funds to invest in.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Tax-efficient investing made easy

An Individual Savings Account (ISA) is a tax-efficient ‘wrapper’ designed to go around an investment. You’ve got until 5 April 2014 to use your current 2013/14 tax year annual ISA allowance before you lose it forever.

 

Splitting the investment
The crucial thing to remember is that in every 
tax year – which runs from 6 April one year to 
5 April the next year – you’re only allowed to invest a certain amount in your ISA. In this 2013/14 tax year, which ends on 5 April 2014, you can invest a total of £11,520 – made up from just the money you pay in, not the interest or growth earned.

This amount can be split in a few different ways. For example, you could save up to a maximum of £5,760 in one Cash ISA. The other £5,760 could be invested into a Stocks & Shares ISA with the same provider, or a different one. Alternatively, you may wish to invest up to the full £11,520 in just a Stocks & Shares ISA.

Tax-efficient returns
Any ISA investment growth, no matter how much, is free from income and capital gains tax (a 10 per cent tax credit is still payable on UK share dividends and cannot be reclaimed).
Make sure that you don’t miss out on tax-efficient returns and start reviewing your options now.

Transferring other ISAs
As well as currently being able to invest your full ISA allowance of £11,520 in a Stocks & Shares ISA, you can also transfer some or all of the money held in previous tax year Cash ISAs into a Stocks & Shares ISA. A Stocks & Shares investment is a medium- to long-term investment, but remember the value of your investment can go down as well as up and you may get back less than you originally invested.

Junior ISAs
A Junior ISA (JISA) is a long-term, tax-efficient savings account for children. Your child can have a JISA if they are under 18, live in the UK and weren’t entitled to a Child Trust Fund account.

There are two types of JISA: a Cash JISA, and a Stocks & Shares JISA. Your child can have one or both types of JISA. Children aged 16 and 17 can open their own JISA, or it can be opened by the person with parental responsibility for the child.

Anyone can pay money into a JISA, but the total amount can’t exceed £3,720 in the current tax year. For example, if your child has £1,000 paid into their Cash JISA from 
6 April 2013 to 5 April 2014, only 
£2,720 could be paid into their Stocks & Shares JISA in the same tax year.