The 2022/2023 tax year ends at midnight on 5 April.
At that time, your various annual allowances expire and, in some cases, can no longer be used. So, you are faced with a “use it or lose it” scenario.
As the deadline approaches, you may well be thinking of setting some money aside for your future.
Read about two of the most popular options, ISAs and pensions, and the issues to consider when you are deciding where to put your money at the end of the tax year.
ISAs and pensions are both tax-efficient options
Both ISAs and pensions are tax-efficient ways to help you grow your money.
ISAs
You can save up to £20,000 into an ISA in the 2022/2023 tax year. This threshold is known as the “ISA Allowance”, and you will lose any remaining amount that you did not make the most of when the new tax year starts.
While you are likely to have paid tax on the money you pay into an ISA, the growth and income is not subject to Capital Gains Tax (CGT) or Income Tax, either within the ISA fund or when you withdraw from the ISA.
There are four types of ISAs you could use to hold your money:
- Cash ISA, allowing you to save tax-efficiently
- Stocks and Shares ISA, allowing you to tax-efficiently invest in a range of assets
- Innovative Finance ISA, allowing you to lend your money
- Lifetime ISA (LISA), a type of account specifically for saving towards a first home or retirement. You must be aged between 18 and 40 to open a LISA, and you can open either a Cash or Stocks and Shares LISA.
You can also hold one of each and divide your ISA Allowance across these four accounts as you see fit, if you are eligible.
Pensions
In the current tax year, you can tax-efficiently contribute a maximum of £40,000 or 100% of your gross income (whichever is the lower figure) to your pension, including employer contributions. This is known as the “Annual Allowance”.
Your Annual Allowance may be higher, as you can carry forward up to three years of unused Annual Allowance into future tax years if eligible.
It could also be reduced if you are subject to either the tapered Annual Allowance or the Money Purchase Annual Allowance (MPAA). Make sure you seek advice if you are unsure whether your Annual Allowance is reduced.
You will receive tax relief at your marginal rate on your contributions. Basic-rate relief is usually added automatically, and then you can claim higher rates of relief through your self-assessment tax return.
When you come to start drawing from your pension fund, up to 25% can be taken free of tax, and you will pay Income Tax at your marginal rate on the rest. This will be from the normal minimum pension age, currently standing at 55 although rising to 57 in 2028.
Your investment timescales are very important
The key issues when it comes to deciding where to invest your money now are timescales and accessibility.
So, it is important to think carefully about what the money is for, and how long you are prepared to see it tied up before you can access it.
The simplest way to consider this is to break down your financial plans between short-, medium-, and long-term options.
Short-term savings for less than 5 years
If you believe you are going to want to access the money you are looking to save now within the next five years, then a Cash ISA may be the most suitable option for you to consider.
As well as standard savings rates, you will find that there are a range of fixed-term Cash ISA offers available if you are prepared to tie your money up for a certain time.
For example, Moneyfacts confirm that the best easy-access Cash ISA interest rate is currently 3.01% as of 27 February 2023, but there are a range of different fixed-rate options with rates as high as 4.05%.
One advantage of the latter kind is that those savings rates are guaranteed and can help you with your forward planning for specific events in future years, such as a big holiday or new car.
Investing money for 5 years or more
If your time frame on the money you are setting aside is five years or more, it could be worth thinking about investing through a Stocks and Shares ISA.
The nature of investment markets means that they fluctuate, so the longer you can invest, the better your chances of reaping the benefits of potential growth on your investments.
You should be aware, however, that as with all investing, there is always a risk you might get back less than you put in.
You will also need to be flexible in terms of when you actually want to take your money. Otherwise, you may end up selling your investments at a low point in the market, meaning you could lose value as you will have to realise a loss at a less favourable time.
Long-term investment for well after your playing career
Saving for a time well after your playing career is over should always be one of your financial priorities. As a result, looking to make the most of your pension Annual Allowance before the end of the tax year could be a sensible choice.
To give your pensions the best chance to grow to a good size for your future, saving as soon as you can might be a prudent decision.
That said, as you can carry forward unused pension Annual Allowance for up to three years, you might want to prioritise your ISA Allowance ahead of the end of the tax year.
Additionally, you will not be able to access your money in your pension until at least age 57, and the government could increase this age further still. As a result, you will need to be confident that you do not need your money in the short term if you are to make the most of your Annual Allowance.
Get in touch
If you would like some advice regarding your tax year end financial planning, please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate tax planning.
