Tax hikes: Why it's time to rethink the way you save and invest
The end of the tax year feels much like the end of term. For those with skin in the game, it’s the be-all-and-end all, but everyone else would be forgiven for thinking it’s just another Wednesday. If you save or invest, the government’s ongoing tax grab means this is one of the most important Aprils in a generation, and it’s vital to take advantage of all your allowances before midnight on the evening of the 5 April. But even if you have very little put aside, the end of the tax year could still make a difference to you.
The big deals for serious savers and investors are the slashing of the capital gains tax allowance from £12,300 to £6,000 and the halving of the dividend tax allowance to £1,000, which means anyone holding stock market investments outside an ISA could end up with a much bigger tax bill. If you’re in this position, and you’ve yet to use your ISA allowance this year, by far the easiest way to save tax is to use the bed and ISA process to sell assets outside an ISA – within your £12,300 CGT allowance – and move them into the ISA wrapper. That way you don’t have to worry about either dividend tax or CGT on these investments at any point.
However, you don’t need large piles of investments to be hit by the tax raid, because the freezing of income tax thresholds – both the point at which you start paying tax and the point when you move from paying basic rate tax at 20% to higher rate tax at 40% – means you could end up losing more of your salary when you get a pay rise.
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With wages rising at an average of 6.7%, more people will cross the frozen thresholds. At the same time, because wage rises aren’t keeping pace with inflation, it means more tax coming out of a pay packet that’s worth less after inflation to start with. It’s worth knowing you can cut your tax bill by making more use of your pension allowance this tax year. If your employer runs a salary sacrifice scheme, it effectively means you can agree to have your salary paid in pension contributions – free of national insurance and income tax.
But you don’t just pay income tax on your salary – it’s also paid on interest from savings above the personal savings allowance, and any income from bonds too. ISAs can protect both from this eye-wateringly expensive tax, and you can squirrel away up to £20,000 in the current tax year. Bonds can be put into a stocks and shares ISA, and savings into a cash ISA.
Cash ISAs fell off the radar for all but the highest earners when the personal savings allowance was introduced. Savings rates were so low at the time that anyone other than additional rate taxpayers would have needed an enormous lump sum in order to bust the limit. However, rising savings rates more recently have tipped the balance for an awful lot of people with a decent chunk of savings – regardless of the tax bracket you’re in.
Even if you don’t have significant savings or investments, so none of these things apply, there are some good reasons to get stuck in this side of the April deadline. In terms of savings, you could get a great rate on a cash ISA. At this time of year, the banks tend to compete more heavily for your money, so we’ve seen some decent rates hitting the market. You might think it’s not worth it if you’re a basic rate taxpayer without much savings, but sheltering your cash in an ISA will protect it from tax if the personal savings allowance shrinks, or if you change tax brackets further down the line.
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If you have any investments or savings at all outside an ISA, moving them into a tax shelter can be an admin life-saver. If you have to do a tax return, any interest that you make on savings, or any cash from dividends, need to be filled in on the form – even if it’s just a couple of quid. Shares and cash in ISAs don’t need to be recorded at all on your tax return, saving you from one more headache when the annual deadline rolls around.
If you’re considering starting investing, you might think the size of the £20,000 allowance means you don’t need to be in a major rush to set up an ISA before the end of the tax year – because you’ll get another allowance on the 6th of April – which is plenty. However, some allowances are lower, including the Lifetime ISA at £4,000 a year. If you’re planning to use it to build a property deposit or save for retirement, and it’s right for your circumstances, you may want to cash in on every year you possibly can, so you as much government bonus as possible. Even with the overall £20,000 allowance you have to bear in mind that it’s not set in stone. The government’s tax grab could extend to cutting allowances further down the track, so you may regret putting it off.
In any case it’s worth giving it some thought now. You might decide it’s not something to worry about, but you might just see a reason to act now, and it’s far better to spot this when you have a few weeks to play with than rushing for the deadline at two minutes to midnight.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
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