The Wire: Summer 2020 – Why you should start your financial planning at the beginning of the tax year

(Estimated read time 4 minutes)

Why you should start your financial planning at the beginning of the tax year

Over the last few weeks, coronavirus has dominated the news, sport and business headlines. With millions of workers furloughed, and many businesses struggling to stay afloat, it’s been easy to miss the fact that we’re now in a brand-new tax year.

The fact the Chancellor didn’t make many significant changes in his first Budget, means that most of your annual allowances and exemptions remain in place, and the beginning of the tax year is the perfect time to consider making your pension and ISA contributions.

ISA limits for the new tax year

Official data shows, that almost £70 billion was paid into tax-efficient ISAs in 2017/18, with a further £902m saved into Junior ISAs.

The ISA allowance remains at £20,000 in the 2020/21 tax year. The limit applies to Cash, Stocks and Shares and Innovative Finance ISAs, and your allowance can be spread between the three types.

While the adult subscription limit may have remained at £20,000, the Chancellor did announce a significant hike in the amount you can contribute to a Junior ISA or Child Trust Fund.

In the Budget statement, the government said: “By saving towards their future, families can give children a significant financial asset when they reach adulthood – helping them into further education, training, or work.”

To support this, the annual limit for contributions to a Junior ISA (JISA) or Child Trust Fund (CTF) has more than doubled in the 2020/21 tax year, from £4,368 to £9,000.

Investing early can boost your returns

If you’re looking to get the most from your investments, history tells us that making your contributions early can boost your returns.

Research from Fidelity, has compared the returns based on investing your full ISA allowance at the start of the past 20 tax years, rather than rushing to make your contribution at the last minute.

Had you invested your full ISA allowance at the start of the past 20 tax years, you would be nearly £12,000 better off now than someone who had decided to wait until the very end of every tax year to make their investment.

If you invested your full ISA allowance in the FTSE All Share on 6th April each year for the past 20 years, your original investment of £219,560 would have grown to £300,492. 

However, if you had waited until the end of each tax year to invest your full ISA allowance into the FTSE All Share every year, the same £219,560 contributions would be worth £288,751 after 20 years – that’s £11,741 less.

Even making regular contributions to an ISA over the course of the tax year, has been shown to provide better returns than waiting until the last minute.

Splitting your annual ISA allowance into 12 monthly investments over the last 20 years would have seen your investment grow to £296,247 – still £7,496 more than if you had waited until the last minute.

Time to make your pension contributions

The start of a new tax year also means that your pension allowances are reset. 

The Annual Allowance didn’t change in this year’s Budget, so you can still save up to £40,000 into your pension (or 100% of your income) and benefit from tax relief.

Again, making your contributions early in the tax year means you benefit from tax-efficient growth as soon as possible. Considering the tax benefits of investing into a pension, this can be a sizeable sum, that is growing tax-efficiently.

While the Annual Allowance remained at £40,000, the Chancellor did increase the thresholds at which the Tapered Annual Allowance comes into effect.

Now, if your threshold income is above £200,000, then you need to check if your ‘adjusted income’ (all income that you are taxed on including dividends, savings interest and rental income, before tax plus the value of your own and any employer pension contributions) is more than £240,000. 

If it is above £240,000, then the annual allowance will reduce by £1 for every £2 that your ‘adjusted income’ exceeds £240,000.

Bear in mind also, that if your income exceeds £300,000, you will see a significant reduction in the amount you can contribute to a pension and retain tax relief.

Previously, those affected the most by the Tapered Annual Allowance saw their Annual Allowance reduced to £10,000 (meaning they could contribute up to £10,000 into their pension each tax year and retain tax relief). Now, the minimum level to which the Annual Allowance can taper down to will be £4,000. 

The government also announced that the Lifetime Allowance (the maximum amount you can accrue in a registered pension scheme in a tax-efficient manner over your lifetime) will rise to £1,073,100 in the 2020/21 tax year.

If it’s time for you to make your annual pension or ISA contributions and you need advice, we can help. Please send us a message via the HFMC Wealth website or call us on 020 7400 4700.

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