According to the Telegraph, the tail end of last year saw a record number of new Stocks and Shares ISAs being opened, as investors tried to lock in the tax benefits.
But what many of those investors may not have realised, is that they had missed out on the growth that a Stocks and Shares ISA could have generated if they had opened it first thing in the tax year.
It’s a trap many fall into , so read on to discover ways you could improve the tax efficiency – and potential returns – of your financial strategy by acting at the beginning of the tax year.
As the introduction suggests, many investors use their £20,000 allowance to open a Stocks and Shares ISA during the tax year, but many do it at the end of the year.
This means your investments are not exposed to the whole year’s potential growth, meaning your tax-efficient returns could be greatly reduced.
Research from Fidelity compared returns based on investing your full ISA allowance at the start of the past 10 tax years, rather than at the end. This assumes total contributions made in the 10-year period were £158,960.
As the below table shows, if you invested at the start of the tax year, you could be nearly £12,000 better off than someone who waited until the end to invest. It also shows that those who invest on a monthly basis – splitting their £20,000 investment across 12 months – are likely to perform better than late investors.
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The same principles apply if you are investing in a Stocks and Shares Junior ISA. You are allowed to invest up to £9,000 in the 2021/22 tax year and doing so early, again, exposes it to greater potential growth.
The same applies to pensions, as the earlier you make your contribution the more exposure it has to potential growth.
Currently, the Annual Allowance remains the same for the 2021/22 tax year, meaning you can pay up to 100% of your earnings (up to a maximum of £40,000) and receive tax relief on the contribution.
Making sure you plan at the beginning of the year means you can create a strategy with your financial planner that will ensure you maximise the tax relief you’ll benefit from.
This is particularly true if you’re a higher earner and could be affected by the Tapered Annual Allowance. Speaking to your planner early in the tax year will help you establish exactly what Annual Allowance is available, and avoid potential tax charges.
Subject to certain criteria, your estate can be worth up to £500,000 before it’s liable to Inheritance Tax (IHT). Married couples will have up to £1 million.
These amounts are known as your “nil-rate band”, and any amount in your estate over and above these figures will be liable to IHT, which stands at 40%. But HMRC allows you to use a number of allowances to gift money to loved ones, which could help reduce your estate to within the nil-rate band.
Planning at the beginning of the tax year means you can ensure you maximise these allowances. If gifting out of your normal expenditure is right for you, it also means you benefit from a full year’s worth of giving, reducing your estate’s value further.
Another way to reduce your estate is to gift a large sum of money. Known as a “Potentially Exempt Transfer” (PET), the gift falls out of your estate if you live for seven years after it is made.
If you do not survive seven years, all or some of the gift could fall back into your estate and be liable to IHT. Waiting until the end of the tax year to make the gift means the seven-year “clock” starts later than it needs to.
Making a PET at the beginning of the tax year increases the possibility of meeting the seven-year rule.
If you are married with investments, or you have more than one property, you may be liable to Capital Gains Tax on the sale of any personal assets. This includes property that is not your main home.
Individuals benefit from an annual exemption of £12,300 (2021/22 tax year), but once the gain exceeds this CGT is charged at between 10% and 28%, depending on your earnings and what you have made the gain on.
Starting a financial strategy early in the tax year means you can plan, giving you time to potentially transfer some of your assets to your spouse to sell, meaning they can utilise their allowance too.
In other words, you could double your household’s exemption to £24,600.
However, always speak with your financial planner who can confirm whether this is the right strategy for you, and to ensure you are not breaching any rule that may incur penalties BEFORE you make the transaction.
A full financial review means you can confirm your finances are as tax-efficient as possible. Maximising the use of your allowances means you can reduce tax as much as possible, but also enables you to reassess your money and investments, and confirm they are on track with your goals.
If you have questions about how you might improve potential growth or tax efficiency ahead of your normal review, please contact us below.
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.