How to financially plan for the New Year
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As we move into the New Year, Phil Beck of Smith & Pinching highlights potential priorities for the coming months.
The first quarter of the year is an important one from a financial perspective as it heralds the lead-up to the end of the tax year on 5 April. This means that anyone wishing to take advantage of the range of tax reliefs and allowances available for the tax year must ensure they do so early enough or they could potentially miss out. It’s important to remember that processing new investments in ISAs or pensions does take time so don’t leave it until March.
ISAs form the bedrock of many people’s investment strategy. Each individual adult resident in the UK for tax purposes has an ISA allowance of £20,000 for the 2020/21 tax year, which can be held in Cash or Stocks and Shares ISAs – or a mix of both. Interest, gains and dividend income within the ISA is free of tax and no tax is payable when you take your money out. You must use your ISA allowance in the tax year: it cannot be carried forward.
Pensions are also a tax-efficient way of investing money for your future, although pension funds cannot be accessed until you reach the minimum retirement age, which is currently age 55. Like ISAs, investment gains and interest on assets held in a pension fund are free of tax, but they have another bonus too: contributions that you make into a pension fund attract tax relief, so the tax you would have paid on the contribution is added to the pot by the Government. The annual allowance for pensions is the lower of 100pc of your earnings or £40,000 for most people, although there are exceptions. When you withdraw your money from a pension fund, you can take 25pc of it free of tax, but further withdrawals will be taxed as income. Unlike the ISA allowance, you can carry unused pension allowances forward for up to three years, although the most recent allowances must be used first.
For those who are looking to manage future Inheritance Tax liabilities, there are a range of gift allowances that allow gifts to be immediately considered outside your estate. These include an annual total gift allowance of £3,000 and special allowances for wedding gifts. In addition, you can make gifts of up to £250 per person to any number of people, provided they haven’t had other gifts from you that would take them over that figure.
Using your annual allowances efficiently is a key step in your financial planning and should be discussed with your independent financial adviser at every review.
Any opinions expressed in this article do not constitute advice. The value of your investments can go down as well as up and you may get back less than the amount invested.
For more information visit www.smith-pinching.co.uk