Taking the time to understand and optimise your financial situation – whether that’s maximising pension contributions or reducing your tax bill – will go a long way to helping you achieve peace of mind and financial security, putting you on the right path to achieve your goals both for the year, and far beyond. Here we shine a spotlight on five financial tips for the 2022/23 tax year:
1. Find out how much you can contribute to your pension plan(s)
Did you know that you could pay up to £160,000 in one lump sum into a pension scheme and benefit from full tax relief (either personal tax or corporation tax, depending upon the source of the contribution)? The amount you can pay in depends on your relevant earnings and income levels, and how much you have contributed in the past three tax years. Pension experts can help you with that calculation. Even if you have no earnings and pay no tax, you can still contribute £3,600 and receive tax relief. Don’t forget to claim tax relief via self-assessment if you’re a higher or additional rate taxpayer.
2. Use or lose your ISA allowance
Each adult can add £20,000 to an Individual Savings Account (ISA) every year. Children can contribute up to £9,000, meaning that a family of four could shelter up to £58,000 annually from income tax and Capital Gains Tax (CGT). Unlike pensions, which are typically ring-fenced until age 55, many ISAs can be accessed flexibly. Flexible ISAs allow you to replace any money you have withdrawn in the same tax year, without affecting the annual contribution limit. The earlier you contribute to an investment ISA, the more time your money has to grow.
3. Pay less tax by harvesting your capital gains every year
Use of your annual CGT exemption of £12,300, alongside careful planning, can see significant CGT savings made over the long term. A couple can achieve a combined allowance of £24,600 (and could, in theory, realise combined gains of almost £500,000 over 20 years without paying CGT). The annual exemption is lost forever if it is not used in each tax year.
4. Beware of invisible losses through inflation
Inflation is currently soaring and is set to remain consistently high in 2022. The Bank of England has forecast that the cost of living, as measured by the Consumer Prices Index, will surpass 10% in 2022, well above the target rate of 2%. Low interest rates alongside inflation leads to a guaranteed loss of spending power, and this effect is exacerbated over time (see chart below). But there are ways to prevent this ‘invisible loss’ from eroding your cash savings/future retirement income. Investments offer better returns if you have a long-term horizon, and can tolerate the ups and downs of stocks and other financial assets.
5. It’s never too early for IHT/estate planning
People often kick estate planning into the long grass, but experience tells us that the earlier you start, the more planning options you have. ‘Have you made a will?’ and ‘Can you reduce your inheritance tax bill’ are just two of the important questions where it pays to plan ahead. Download our ‘Top tips on IHT/estate planning’ factsheet for a comprehensive guide to IHT/estate planning.
Reach out to the Lumin team on 03300 564 446 for a free initial meeting, or fill in our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
