The end of another financial year...

The year end is upon us and for some that doesn’t mean a lot but for others, this shows the last accounting period for their businesses. Whether you’re an employed person, director of a limited company or a sole trader. There are many things that could be applicable to you at this time of the year.
April the 5th is the last day of the financial year, this year, this falls on a Tuesday. So, what does that mean for you?

Each year, there are some allowances in which we are given by the Tax-Man (or woman, ha) at HMRC and the cut off for those is the date previously noted. In some circumstances we are allowed to carry some forwards but in others, we lose them.

Each year we have a Personal Income Allowance, Annual ISA Allowance and an Annual Pension Contribution Allowance, which are just some that I will touch on today. There are others that may be applicable, although these are the most common that can and mostly apply to everybody. 

Taking tailored individual advice, will help to highlight allowances that are appropriate for your particular circumstances to ensure that you maximise the efficiency of these.

Personal Income AllowanceFor most, this will happen naturally. HMRC allow us to have earned income of £12,570 (in the current tax year 2021-2022) before we start becoming eligible to paying any income tax. Under certain circumstances, your personal allowance may be reduced, usually as a high earner or taking benefits in kind, such as, a company car etc. It’s good to check with a professional if there is any unused allowances available to you, as sometimes we can look to transfer the use of some of the allowance towards a spouses earned income, therefore saving us some valuable pounds in tax.

Annual ISA Allowance

The annual subscription that we are able to contribute into an ISA (Individual Savings Account) is £20,000 and this can either be invested in Cash, Stocks & Shares or a combination of the two. It is important to note that you can only have one Cash and one Stocks & Shares ISA in any given tax year. There are benefits and drawbacks to each type of these investments and the most important thing to do, would be to research and take professional advice.

Depending on the reason for your investment and the time horizon (the amount of time that you plan to leave your money invested) will depend on which route is most appropriate to you and your financial plan. An ISA is effectively the wrapper that sits around the investment and the wrapper of different investments is essentially how the ‘account’ if you like, is treated for taxation purposes. ISA’s are a really tax efficient way of saving, the investment growth is completely tax free, as are the accumulated funds when you look to withdraw them in the future. I have lots of clients who have both ISAs and pensions and within their financial planning, we assume that these funds could potentially be invested towards supplementing the money needed for your first home, a luxury holiday or some pounds stashed away towards your retirement income. Whatever the reason, a potentially good way to save and look to grow your money but also to accumulate a tax free pot and be able to take a tax free income at a later date.

Pensions

Lucky for you guys, I saved the best until last…
There’s many myths around pensions and a lot of my older generation clients don’t actually really like pensions but in some cases this is due to the changes in rules and regulation over the past years. What is important to note, is that, pensions are the most tax efficient form of saving. So, what do I mean by that?Well…any money that we save into a pension is eligible for tax relief, meaning that this is one of the only ways that we are able to save money and pay no tax, or claim back tax that we have already paid. Sounds like there should be a catch here doesn’t it?No catch, just a great product that is unfortunately sometimes misunderstood.As mentioned before, advice needs to be tailored but here I will provide a generalised overview.An employed person - if you have a workplace pension, my advice here would always be to fully maximise what your employer will additionally match for you. This is like getting a pay rise for the future you and really without costing you much at all, who doesn’t like free money? You are also able have a personal pension alongside your workplace scheme and the contributions would be reclaimable against tax, much like the example below.

A self-employed person / sole trader - like me, we are able to save into a pension and reclaim some of the tax that we have already paid. As example, for every £500 that is invested into a personal pension, it only costs you £400. That gives you an uplift of £100 before you’ve even started to look to invest your funds for potential investment growth? No brainer, maybe?
A limited company director - you are able to contribute to a pension directly from your company meaning that, any funds invested are 100% deductible against corporation tax. In the current tax year and up to 1st April 2023 this saves you a minimum of 19% but thereafter will be saving you 25% at least, on those funds. Annually, this could save a company director £7,400 or more in corporation tax. That’s a significant saving on wasted £££s in tax payments.

Each person has an annual allowance, again, more advice probably needed but for most it is £40,000 or 100% of your uk earned income. For a non working person this is reduced to £3,600 which actually only costs you £2,880 - is your spouse a homemaker? By utilising their annual allowance, not only do you get to reclaim tax paid essentially by you, you are investing further into both of your future lives.

Anyhow, as always, thanks for checking in and please don’t hesitate to reach out with your questions.

Much love