As the festive season draws to a close, and you start contemplating the year ahead, it can be worth including some financial resolutions on your list.
A few simple steps can help you work towards a secure future, avoid nasty shocks and insulate yourself from potential financial problems. Here’s where to start.
Pension contributions
You’ve got three months to the end of the tax year, so you have plenty of time to make additional pension contributions if you haven’t used all your allowance for this year.
Your maximum contribution is £60,000, or your total earnings, whichever is lower, and you can bring forward allowances from the previous three years.
Pension contributions can be particularly useful if you are on the edge of a particular tax band, or on the edge of the cut off for free childcare (currently £100,000 of annual income for one parent). Paying more into your pension can bring your earnings down below the threshold.
If you don’t have the spare cash to make contributions, consider recycling savings held outside a tax wrapper into a pension. In the longer-term, this will ensure the money can grow, free from capital gains tax and dividend tax.
Use up your other allowances
The ISA allowance is £20,000 and operates on a ‘use it or lose it’ basis. It is worth using as much as you can every year if possible, alongside pension contributions.
While there is no tax relief on contributions, investments held within an ISA are free from capital gains (CGT) and income tax. New rules around CGT means it’s more important than ever to use your tax-free allowance every year. This is £3,000 for the 2024/25 tax year.
Equally, for married couples or those in a civil partnership, it is worth remembering that you can make tax-free transfers between the two of you. It is worth equalising any income-generating assets to make sure you use both of your allowances.
Get gifting
Inheritance tax rules are becoming more stringent. One of the easiest ways to reduce the inheritance tax bill for your heirs is to use your gifting allowance of £3,000 every year.
You can also make ‘regular gifts out of income’ – these gifts can be as high as you like if you can show that it doesn’t diminish your standard of living.
Get ready to submit your tax return
The need to submit a tax return at the end of the month and pay any outstanding liability can be a significant contributor to the January blues. As Archbishop Desmond Tutu once said: “There is only one way to eat an elephant: one bite at a time.” The same is true with tax returns.
Setting aside 10 minutes per day to get to grips with it can make it less painful. If you start early, there are still actions you can take to mitigate your bill.
Please contact your financial planner before taking any action.
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