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10 resolutions to bolster your personal finances in 2023 and beyond

personal finances Close up of British one pound coin on the british banknotes.
Find out how to better manage your personal finances as the cost of living crisis follows us into 2023. Photo: getty

Few will be seeing their personal finances end the year in better shape than they started, as the combination of higher mortgage payments, bills, transport and food shopping costs forced many UK households to rethink their budget.

From getting ahead of tax changes to creating a budget you can stick to and paying off debt, here are 10 top tips from Alice Haine, personal finance analyst at DIY investment platform and coaching service Bestinvest, to help put yourself on the best financial footing possible for the new year.

Check your tax code to make sure you aren’t paying too much

Thanks to the raft of tax changes unveiled by Jeremy Hunt in the Autumn statement, the UK is set for a lengthy period under a historically high tax burden.

With the personal allowance and higher rate income tax thresholds now frozen until 2028 and the 45p top rate of income tax set to kick in at £125,140 from April, rather than the current level of £150,000, making sure you are paying the right amount of tax is vital.

Visit www.gov.uk/check-income-tax-current-year to check your tax code and other income details to make sure it is correct for your circumstances.

Read more: 2022: Year in review

Millions of tax codes are wrong every year and it is your responsibility, not your employer’s or HMRC’s, to check it. You might find you have been overpaying tax, or underpaying, with one having a more obvious benefit than the other. This can happen if you change jobs, earn money from more than one source, such as a part-time job or a property portfolio, or have recently retired.

And don’t forget the end of January deadline for filing your self-assessment tax return, or you could face a late filing penalty.

Take note: Checking your code could see you receive a generous rebate, though if you’ve been paying too little you may be out of pocket too.

Get to grips with your tax allowances and save £1,000s

Getting up to speed on all the tax allowances and tax reliefs that apply to you could give your finances a nice little boost. Some people assume the UK’s tax system is far too complex for them to understand, but by not doing their research they are effectively saying no to free money and paying tax on things they don’t need to.

While the first £12,570 of most people’s income is not taxable, this personal allowance could be higher if you claim marriage allowance, where a lower-earning partner transfers up to £1,260 in the 2022-23 tax year to the higher-earning partner, which can reduce their tax by up to £252. Note, however, this is only available for couples where neither pays the higher rate of tax.

There are dozens of other allowances such as the trading allowance of up to £1,000 for casual income such as from baby-sitting or odd jobs in the community; a property allowance of £1,000 to account for any income derived from your home or land, such as letting someone park on your driveway or store items in your garden shed, and the £7,500 rent-a-room scheme if you let out a room to a lodger in the home you live in.

Read more: Money: What to expect in 2023

There is also tax relief on maintenance payments for the divorced, uniforms you need to buy or repair and maintain for work and charity donations plus a whole host of others so do your research to cut your tax burden. It’s often a case of use it or lose it on tax allowances and reliefs as some can be carried over for a set period and others can’t.

Take note: Don’t forget interspousal transfers, where a married couple can move savings and investments to whichever spouse is subject to lower tax rates. Married couples can transfer assets between one another without triggering a tax event; that’s why they should maximise allowances such as the personal savings allowance, dividend allowance, ISA allowance and Capital Gains Tax allowance to reduce the overall amount of tax exposure for the family.

Boost your pension contributions to secure an inflation-beating return

Saving into a company or personal pension has long been considered the most tax-efficient way of saving money for retirement, but this has become even more attractive due to the extended freeze on the basic and higher rates of income tax until 2028, which will drag millions more into a higher tax band.

From April, higher rate taxpayers should look to boost their pension contributions because the threshold on the additional rate of tax of 45% will lower to £125,140 from £150,000.

Funnelling more money into a workplace or private pension such as a self-invested personal pension (SIPP) is one way to offset the tax hit to come because tax relief applies to your pension contributions at your highest rate of income tax. Once the money is added to your pension, however, you cannot touch it until you are 55, or 57 from 2028.

The benefits of a workplace pension scheme, for example, include the employer paying the minimum 3% stipulated by the government’s auto-enrolment rules, taking the total contribution to 8% with the employee’s 5% contribution. Many companies pay more than 3% and some will also match higher employee contributions to a set level ⁠— which is effectively free cash that boosts your pension pot.

There is more free cash in the form of tax relief on contributions into a workplace or private pension paid by the government at the marginal income tax rate. Basic rate taxpayers get 20% added to their pot on each contribution, while higher rate taxpayers on the 40% tax rate get a further 20% knocked off their tax bill.

Read more: From tax raids to the dashboard: Key pensions issues to watch in 2023

As an example, for every £100 gross contribution paid into a pension by a 40% taxpayer, the net cost will be just £60 with half of the tax relief going into the pension as a top up to boost its value and the other half reducing your income tax bill.

For additional rate taxpayers on the 45% tax rate, they can get an extra 25% knocked off their tax bills in addition to the 20% state top-up under the current rules, making the net cost for every £100, just £55.

Just remember that unless you are fortunate enough to have adjusted income of over £240,000 a year (and will therefore be subject to a tapered allowance), the annual allowance limit you can pay into your workplace or private pension per tax year is £40,000 gross or 100% of your salary ⁠— a limit that encompasses all contributions across all pension arrangements, tax relief and employer contributions.

Take note: Go over the pension contribution limit and you risk incurring a tax charge. Thankfully, you can carry forward any unused annual allowance from the previous three tax years. So, use up your allowances in the run up to the end of the tax year in April, particularly if you are a higher earner.

Plan for the unknown by building an emergency pot but don’t bust your savings allowance

As the cost of living crisis rumbles on, it is imperative for people to have back-up savings ready for those unexpected expenses. From frozen pipes to car repairs following an accident or even job loss, life has a habit of throwing sudden, and often expensive surprises at you that need to be paid for.

Bestinvest suggests people to hold six to 12 months of their regular expenses in an emergency fund, so if you don’t have that money safely tucked away yet, start building it in 2023. Emergency funds often need to be accessed quickly, so the best option is an easy access savings account, separate from your current account.

While high inflation will erode those savings, the good news is that savings rates are now significantly higher than the average 0.19% in 2021 with the top easy-access accounts now offering 2.85%.

While some people might feel they have nothing to spare amid the cost of living squeeze, saving just a small sum each month will ensure you slowly build towards your target, bolstering your financial reserves with each contribution.

Read more: Money new year resolutions: How to plan your finances for 2023

By automating that saving to happen straight after your salary lands in your current account, it means you can instantly forget about it ⁠— a great ploy to let your money toil away in the background. Just £50 saved a month from 1 January in an easy-access account with a 2.85% rate will give you £609.36 by the end of the first year or £1,236.30 by the end of the second year.

Take note: Don’t keep too much cash in your emergency pot or other savings accounts, as you could be liable for tax. The combination of higher interest rates and frozen or lower thresholds on income tax means base-rate taxpayers are at now risk of busting their £1,000 personal savings allowance.

Meanwhile, those paying the higher 40% tax rate are in more peril as the allowance drops down to £500. Additional tax rate payers receive no concession at all making it imperative they hunt out more tax-efficient options for their savings, or if they are married and their spouse is a non-taxpayer or subject to a lower band, they consider transferring cash savings to them.

Max out your ISA allowance to protect savings and investments from tax rule changes

While breaching the personal savings allowance is more of a risk for savers, there are similar challenges for investors.

The annual allowance for tax-free dividends will be halved to £1,000 from April from the current £2,000 and then drop to a mere £500 the year after that. It therefore makes sense to move excess savings as well as shares or funds outside tax-efficient wrappers inside an indvidual savings account or SIPP.

While a SIPP locks money away until retirement age, an investment ISA, which can shelter up to £20,000 per tax year with all gains and income generated free from tax, can be accessed any time.

While investing comes with risk as the value of your portfolio can go down as well as up, if you do your research and invest regularly ⁠— such as every month ⁠— to take advantage of pound-cost averaging to cushion the effects of volatility by lowering your investment costs over the long term, the returns have a better chance of beating inflation.

Take note: With the tax year ending on 5 April, you can maximise this year’s allowance of £20,000 before that date and then move a further £20,000 from 6 April, protecting £40,000 from tax within four months of 2023 starting.

Use up your capital gains tax allowance before it halves

Another major change that raises stakes for savers and investors affects the capital gains tax (CGT) allowance. This will drop from £12,300 currently to £6,000 from April and just £3,000 from April 2024.

A process known as Bed & ISA carried out before the end of this tax year can protect investors as it involves selling shares and funds held in a taxable environment and then repurchasing them within an ISA. Just do your calculations carefully to ensure you don’t exceed the CGT allowance in the process.

Crystallising gains before the end of the tax year makes huge sense if you have sizeable sums outside a tax wrapper, particularly if you want to gift cash to a family member. Setting up an ISA or SIPP for a child can have enormous tax benefits for the beneficiary, as well as setting their finances up for a secure future.

If you have maxed out your investment ISA, you could consider a Junior ISA (JISA) for your children or grandchildren (if they are under 18), to give them a helping hand with clearing student debt or other major life events such as a wedding.

Read more: From bitcoin to unloved stocks: The best and worst performing investments of 2022

Small regular contributions can quickly compound into a sizeable sum. A contribution of £50 a month in an investment JISA earning 5% per year net of charges over 18 years would result in a pot of £17,333, from a total contribution of £10,800 ⁠— an investment gain of £6,533.

Children can roll the entire amount accumulated in their JISA into an adult ISA tax-free when they turn 18 ⁠—giving them a nice financial cushion to kickstart their new, more independent lifestyle.

Take note: While giving and receiving cash does not incur a tax bill, if you die within seven years of making the transfer then inheritance tax (IHT) rules will come into play. This applies if the value of your estate exceeds £325,000 at death, with amounts over this limit potentially attracting a tax-charge payable by your beneficiaries.

Create a budget you can stick to using the 50-30-20 rule

Creating a monthly budget is a vital way to control and understand the state of your finances. It can be as simple as writing down your outgoings on a piece of paper so that you know exactly how much money you need to pay your vital bills every month.

Include the "must-have payments" such as rent or mortgage costs, utility bills, council tax, insurance and food, car payments, commuting to work costs, phone and broadband, saving and investments etc. Then add in the "like-to-have payments" such as going out, gadgets, holidays, subscriptions to streaming services or gym memberships. Add it all together and see how much you spend every month.

Then, deduct that figure from your net income ⁠— the amount you take home every month after paying taxes. This quickly tells you whether you are spending within your means. If you are spending more than you earn, your first trick will be to cut expenses from your like-to-have list to help reduce your outgoings. If the situation requires more aggressive action, scrutinise the must-have list to see if you can trim expenses there.

One budgeting method that ensures you meet regular bills and safeguard your future is the 50-30-20 rule. With this strategy, people should direct 50% of their income towards their needs ⁠— the essential living expenses such as household bills, food and transport to work.

Read more: Interest rates: What to expect from the Bank of England in 2023?

A further 30% is then directed towards your wants ⁠— the things that we like to have in our lives such as leisure activities, shopping trips, gym memberships and holidays.

The final 20% should then focus on paying off debt, saving for short- and medium-term goals, and investing for the long-term.

Everyone is different, so tweak the 50-30-20 rule depending on your priorities. If growing your wealth or early retirement are key financial goals, then allocate 30% of your income ⁠— or more, if you can spare it ⁠— towards saving and investment and trim back on the wants in life.

Take note: To slash your expenditure in 2023, carry out an audit of your direct debits and standing orders. It’s easy to lose track of the services or subscriptions you’ve signed up for but trawling through your regular payments on your digital banking app could highlight things you no longer use or are overpaying on.

Use the ‘debt snowball’ or ‘debt avalanche’ methods to clear your liabilities

There’s no question that 2022 has been expensive but if taking on fresh debt has been the only way to finance the extra costs, then you need to get a handle on that situation quickly.

While signing up for a mortgage to buy a property or a credit agreement to buy a car is considered good debt because it can enhance your life and is backed by a physical asset, bad debt, where you borrow excessively on multiple credit cards, overdrafts or loans, can have the reverse effect.

This is because of the spiralling effect of compound interest on the debt, where you not only pay back interest on the original credit but also on the interest that has accrued. If you cannot repay your outstanding credit card balance in full and only pay the minimum each month ⁠— the lowest amount you must pay your creditor ⁠— this could keep you in debt for years.

If you have multiple debts, first face up to them, and second, develop a strategy to repay them in a set amount of time. With the debt avalanche and debt snowball methods ⁠— great for clearing consumer debt such as credit cards and loans ⁠— you list all your debts and make minimum payments on all but one. Then once the card or loan is cleared, target the next balance until all the debts are gone.

Read more: Top tips for filling in your tax return

The difference between the two strategies is that with the snowball method, you target the smallest debt first and the biggest debt last ⁠— as the smaller liabilities will be easier to clear offering encouragement along the way. Meanwhile the avalanche approach targets the highest-interest debt to reduce the overall cost of your liabilities.

Along the way, you could consider a 0% balance transfer deal, where you get a new card to clear the debt and then have 0% interest applied for a set period ⁠— which can be as long as 34 months.

That way you can clear the debt at your own pace without fear of it compounding out of control ⁠— just make sure you pay back a set amount each month with the aim of clearing it all during the 0% period. Some cards charge a balance transfer fee, so factor that into your calculations

Take note: If you have missed payments, don’t bury your head in the sand. Contact your creditors and ask for help; they are then more likely to reduce payments in the short-term, offer a payment holiday or develop an affordable repayment plan to help you catch up on missed payments.

For unmanageable debts, organisations such as Citizens Advice, the Debt Advice Foundation and StepChange Debt Charity offer free debt advice to get you back on track.

Take control of your mortgage before higher repayments kick in

Mortgages became a big talking point in 2022 thanks to the Bank of England’s consistent programme of interest rate rises and Kwasi Kwarteng’s disastrous mini-budget, which sent borrowing expectations soaring and caused buyers to fail affordability checks or struggle to secure an offer after lenders pulled products amid soaring borrowing expectations. It left some buyers effectively locked out of the market as mortgage rates shot up to their highest levels in well over a decade at 6.65% for an average two-year fixed product.

While the situation has eased with average two-year fixed mortgage rates dropping back under 6%, interest rate rises are still on the cards with a peak of 4.5% expected next Spring. While this is slightly better than the 6% or more feared after the mini-budget, the mortgage pain will be felt for some time as those emerging from fixed-rate deals taken out before the era of rising rates may have to pay hundreds of pounds more per month.

With about 1.8 million homeowners coming to the end of fixed deals next year, you might want to speak to a mortgage broker to assess the best product for your risk profile. Fixed-rate deals might seem less appealing in the current climate when compared to cheaper tracker mortgages, which follow the BoE’s base rate with a set percentage on top, such as 1%. But tracker repayments will almost certainly go up in the short term ⁠— though they may also come down in the longer term.

Take note: The mortgage mayhem is set against a downturn in the property market with price falls of at least 5% or more expected next year ⁠— something that would negatively impact a borrower’s loan-to-value band.

While it is possible to lock in a new deal up to six months ahead, with so much uncertainty this might not be the best move as better rates could emerge within that timeframe ⁠— so get that review call in with your broker to weigh up the options.

Change your money mindset and book a financial review

Once you’ve got to grips with your debts, savings, investments, mortgage and budget, it’s time to adopt a fresh mindset towards money ⁠— one that ensures you reduce spending and increase savings and investments to safeguard your future.

If overspending is your issue, make it harder to access your cards so that you cannot shop online easily, develop strategies to delay purchasing such as taking a 24-hour break before you buy after spotting something you like.

If you have big savings and investment goals, consult a financial coach who can help you decide the best way to get there. While short-term goals, such as a holiday, can be saved for in a regular savings account, medium-term and long-term goals can take advantage of low-cost, tax-free options such as ISAs and SIPPs.

Read more: House prices: Should you buy or sell your house next year?

The online investment platform for private investors also offers free financial coaching, where qualified financial planners outline what you could do with your money, while fixed-fee financial advice packages are available to helps users to decide what they should do with their money, such as investing in a ready-made Portfolio.

Take note: A financial coach can outline different ways to invest while also talking through effective strategies to hit your goals such as the importance of automating your savings through standing orders that move money from your main account straight after pay day into a savings account or investment ISA.

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