Best time to think about your finances is at the beginning of the tax year – think of it as a spring clean. Rachel Lacey has some great tips to get off on the right foot.
2023 sees the tax burden on investors grow significantly, but there are some extra breaks available from April this year, if you know where to look, as well as ways to beat the changes.
Rather than leaving it all to the last minute and risk missing opportunities, find out how thinking about tax at the start of the new year can reduce the amount you pay and boost the value of your investments.
KEY TAX CHANGES FOR INVESTORS IN 2023-24:
- Capital gains tax (CGT) allowance falls from £12,300 to £6,000
- Dividend tax allowance falls from £2,000 to £1,000
- Annual allowance for pensions rises from £40,000 to £60,000 (but no more than 100% of your income)
- The lifetime allowance charge is scrapped
1) Use your ISA allowance
Each year you can invest up to £20,000 into an ISA – a move that will shelter your money from income tax, capital gains tax and dividend tax. There will be no tax on that money as it grows, nor when you eventually withdraw it.
But if you’re thinking about investing all or part of this year’s ISA allowance, it pays to think about how you’ll go about it. Will you pay in a lump sum now, or invest regularly over the course of the year?
Logic dictates that the best approach is to pay in lump sums, if you can. This is because it maximises the amount of time your money is in the stock market where it can grow. But it can be a nerve-wracking experience investing larger amounts, especially if markets don’t play ball. By investing regularly and drip-feeding money into the stock market, that risk is reduced and you get to benefit from what’s called pound cost averaging. This means that rather than buying your holding at one price, in one go, you end up paying an average price over the year – a strategy that can give you smoother returns as well as some protection from sudden market corrections.
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Which approach nets the best returns, however, ultimately depends on how financial markets perform and how much time you’ve got until you dip into your ISA.
Over the last 12 months, volatile markets have favoured regular investors. A monthly £50 investment into the FTSE World Index during the 12 months to 31 March 2023 would have been worth £617 (excluding charges). Had that money been invested as a £600 lump sum it would actually have shrunk to £596.
But it’s a different picture over a longer time frame. Over five years, investing the same amounts into the FTSE World Index (£3,000 in total), our regular investor ends up with £3,809, but our lump sum investor gets £5,003. And over 10 years (£6,000 in total), the lump sum investor ends up nearly £7,000 better off with £17,436, compared to £10,625 for the regular investor.
If you do decide to go with lump sum investing it also pays not to delay. It’s all too easy to leave it until so-called ISA season towards the end of the tax year, but that’s really just a reminder to use your allowance before you lose it.
The sooner you invest it, the more time it will have to grow and over the years it’s a strategy that can really pay off. It is especially effective during a bull market, when stock prices benefit from relatively consistent upward momentum.
Take an investor paying £10,000 into their ISA for 20 years. If the payment is made at the end of the tax year, they would finish with £334,749, but if it’s made at the start of the tax year, they would get £351,875 – effectively an extra year’s investment growth (assuming 5% return each year).
2) Top up your pension
You can now pay a further £20,000 into your pension each year, following an increase in the annual allowance for pensions from £40,000 to £60,000 – so long as it’s not more than 100% of your income for the year.
In addition to boosting your retirement savings, this could also be an effective way of sheltering more of your money from tax.
If you are earning north of £100,000 a year, topping up your pension could also be a particularly lucrative tax move. That’s because you lose £1 of your tax-free personal allowance (currently £12,570) for every £2 you earn over £100,000, creating an effective income tax rate of 60%. By making additional pension contributions that take your earnings below £100,000, it’s possible to protect your personal allowance.
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Although the annual allowance remains in place, there is now effectively no limit on the total value your pension can grow to. The lifetime allowance charge was scrapped in April and the allowance itself will officially be abolished in April 2024.
3) Keep an eye out for capital gains, even if you have no plans to sell
Any investments you hold outside ISAs or pensions, could become subject to capital gains tax when you sell them, if your gains exceed the CGT allowance.
In April this year, the annual exempt amount for capital gains tax was cut from £12,300 to £6,000 and is scheduled to fall again to just £3,000 next April.
These reductions mean many more investors will start having to pay CGT for the first time, which is charged at a rate of 20% for higher-rate taxpayers or 10% for those that pay at the basic rate (unless the gain pushes you into the higher tax bracket).
So, even if you’ve no need to sell any investments this year, it’s a good idea to keep an eye on the money you are making. If your gains look like they may exceed the annual exempt amount when you do come to sell, you can mitigate that by planning ahead.
This can be as simple as selling investments up to the annual exempt amount each year. Although you can’t reinvest that money in the same investment straightaway, there’s nothing to stop you buying an equivalent. One FTSE 100 tracker, for example, is much like another.
If you haven’t used your allowance for the year, you can also consider moving existing investments into your ISA using Bed and ISA rules. This involves selling investments and rebuying them immediately within an ISA. Not only can this be another way of managing a looming CGT liability, but it also means the money is sheltered from tax in future.
4) Decide where to invest
2022 was a volatile year, but while some experts were feeling optimistic for 2023, aided by news from the Office for Budget Responsibility that we’ve narrowly avoided recession, inflation has remained persistently high and further interest rate rises are now predicted. More volatility, it seems, looks highly likely.
While this will always present opportunities for stock-pickers, it’s also a timely reminder of the benefits of holding your nerve, diversifying your investments and the importance of taking a long-term view.
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If you’re in actively managed funds, it may also be a good opportunity to check their performance. If they aren’t beating the index, you’ll be able to save money by switching to a low-cost tracker.
5) Do your tax return!
If you need to complete a tax return, chances are you don’t think about it until the depths of winter. But while the deadline for filing your 2022-23 return is 31 January 2024, there’s nothing to stop you getting ahead and doing it now.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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