This new tax year brings changes for many. The introduction of the 1.25% increase in National Insurance contributions alongside the rising cost of living, means now more than ever people need to be savvy with their money.
To ensure you are getting the most out of your money and taking advantage of any potential savings, Mike Barrow, financial coach at Claro Money shares some of his top tips for this financial year.
- Prepare for the year ahead
There are several things to consider at the start of the new tax year. If you are employed, it’s important to check your tax code on your pay slip to ensure you are paying the right amount of tax and national insurance. As national insurance has just risen, this month’s payslip many look different to previous ones. If you think that amount, you’re paying is wrong, you should contact HMRC.
If you’re self-employed, get into the habit of saving for tax now and throughout the year. It’s a good idea to transfer a portion of your income, perhaps 25-30%, into a separate account for this purpose. For those who are married or in a civil partnership, and one of you is a non-taxpayer and the other a basic rate taxpayer, you may be eligible for the Marriage Tax Allowance, which can give you £1,250 tax back.
Finally, your cash ISA, Stocks & Shares ISA, Lifetime ISA and pension allowances all reset at the beginning of the tax year. This means that you can start putting money into these again. The earlier in the year you start, the longer there is for your contributions to generate interest or returns.
- Make savings on Income tax
Pension contributions attract tax relief. Through the typical ‘relief at source’ method whereby pension contributions are made or collected after tax, basic rate tax relief is given automatically in the form of additional contributions to your pension. Higher rate taxpayers can claim additional tax relief, but this not done automatically and must be claimed via self-assessment. Tax relief can usually be claimed and backdated up to the previous four tax years.
Beware of the 60% tax trap. People earning an adjusted net income of over £100,000 per tax year will start to lose £1 of their personal allowance for every £2 that they earn over the £100k threshold. This means that those earning £125,000 or more will have zero personal allowance and will begin paying tax from the very first pound they earn. The term ‘adjusted net income’ is key there which means your total taxable income minus certain tax reliefs. This is often referred to as the ‘60% tax trap’ as any income between £100k- £125k is in essence taxed at an effective rate of 60% (higher tax rate plus loss of allowance at 20%).
For those that are self-employed under the typical sole trader status, it may (certainly not always) be worth considering setting up and registering your business as a limited company. The tax reporting is often more complicated however, for those that draw an income from a limited company (depending on the amount) the tax burden is often reduced. This is largely due to the option of drawing dividends from company profit. Using this method, company directors can utilise the dividend allowance (currently £2,000) while also benefiting from lower tax rates on dividends in comparison to salary; 8.75% for basic rate (rather than 20% for salary) 33.75% for higher rate (rather than 40%) and 39.35% for additional rate taxpayers (rather than 45%).
- Save on National Insurance
Making workplace pension contributions via salary sacrifice rather than the typical ‘relief at source’ method can be an easy way to reduce your national insurance payment. With salary sacrifice you essentially hand over or ‘sacrifice’ a certain portion of your salary (whatever you choose) to your employer for them to contribute into your pension on your behalf. The biggest benefit of doing so is that, because you have technically reduced your salary by X amount, and this amount has been taken from your salary before tax as a gross deduction, you are left with a lower remaining salary to be liable for national insurance. The effect is usually a slight increase in net income.
However, there are some drawbacks of this method, such as the workplace benefits like Death in Service policies which are usually based on a multiple of salary, would be based on a lower salary amount. Also, if you are expecting to take any loans which use affordability checks (such as a mortgage) your salary may appear lower for the same reason.
- Switch saving accounts
When people consider building cash savings, the idea of easy access savings accounts comes to mind. While these types of accounts offer the ultimate flexibility and are ideal for some things like emergency funds, they’re often not the best tool for growing your cash savings over the medium-long term due to the typically low interest rates they offer in comparison to other types of accounts. There are several other cash savings vehicles available which can traditionally offer higher interest rates on your savings in exchange for sacrificing a level of flexibility and access to your money.
Important note: while the above is usually true, current market comparisons can show that the top easy-access accounts can pay equal or even greater interest rates than some of the below options so always double check and compare! Also, with the potential of rising interest rates soon, it is worth considering whether longer fixes or notice periods are worth the potential benefit.
Consider what might be the best savings account for your saving goals, as different ones offer different perks and limitations. For example, notice savings accounts usually offer slightly higher interest rates in return for having a certain notice period on withdrawal before receiving your money. If you’re looking to save a lump sum or essentially lock away your money for certain periods of time, fixed rate savings accounts are a good choice, which usually offer a comparably higher rate in return. Regular savings accounts are best for those who are saving a consistent amount each month.
To prepare for the financial year ahead making changes now could reduce the squeeze placed on your finances as the cost-of-living rises. Taking steps to save on personal taxes and getting the most out of your money by switching accounts are simple ways to slightly ease the financial pressure placed on Brits this year.