Get the most out of the 2021-22 tax year
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
What if it was possible to put more money back into your pocket – possibly £100s or £1,000s – by taking a bit of time to ensure that your savings and investments are set up correctly? In this article, our financial planning team at Castlegate here in Grantham, Lincoln and across the East Midlands, offer insights into how this can be achieved by making the most of the 2021-22 allowances available to you.
We hope you find value in this content. If you would like to discuss any of these matters or discuss your own financial plan with us please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
Using your ISA wisely
In 2021-22, you are allowed to put up to £20,000 per tax year into your ISA(s). These individual savings accounts come in many forms (e.g. Cash, Innovative Finance and Stocks & Shares) and anything you put in there is exempt from tax on interest, dividends and capital gains. This is available to you on top of your tax allowances for each tax year. This opens up the possibility to save on tax, with some careful planning.
For instance, basic rate taxpayers can earn up to £1,000 interest each tax year, outside of an ISA wrapper, without tax through the Personal Savings Allowance. As such, if you have £50,000 in cash savings and most savings accounts in 2021 struggle to beat 1%, then your interest may not be much more than £500. Putting this – and more – cash into an ISA, therefore, does not save any tax and would stop you from using your £20,000 tax-free allowance elsewhere.
With investments, however, things can get more complicated and it can help to discuss options with a financial planner to ensure you get the most out of your ISA allowance. Suppose you hold a range of assets including capital growth shares (i.e. which you plan to sell for a gain in the far future), dividend-paying shares and bonds – the latter two paying you an income. Should you put all of these into an ISA? It depends on your financial goals, asset balance and horizon.
For example, if you hold a large number of the first category (capital growth shares) which you will not sell for at least 10 years, then you may not need to hold them in an ISA. This is because capital gains tax (CGT) only applies at the time that you “dispose” of the asset. In the meantime, you are entitled to a £12,300 CGT-free allowance each tax year, which you could use if you needed to restructure your equity portfolio. On the other hand, if you think you will sell these assets soon and also own a second property (e.g. a buy to let) which you think you may sell, then it may be worth starting to move the equities into an ISA structure. This will allow more of your CGT-free allowance to be applied to the sale of your property when the time comes. The equities in your ISA, moreover, would then also be shielded from CGT if you sold them for a profit.
Prudent pension planning
In 2021-22, you are also allowed to put up to £40,000 into your pension pot(s) each tax year – or up to your annual earnings (whichever is lower). As a basic rate taxpayer, any contributions get 20% tax relief from the government – meaning that it costs you 80p to put £1 into your pension. For a higher rate taxpayer, the relief is even better at 40%.
Whilst any unused ISA allowance is gone forever once the tax year ends, pensions are a bit more flexible. You can use any unused allowance from the past three tax years. In theory it is possible that an individual could benefit from the current allowance of £40,000 together with a further 3 years of carry forward. Maximising all allowances could enable contributions of £160,000. Eligibility to make this level of contribution will be subject to the contribution source, whether this be personal or employer contributions and income levels.
These rules not only provide a great opportunity to boost your pension growth through the available tax relief on offer, but could also enable higher earners to make a good tax saving in the short term. For instance, if you are on £60,000 per year then £10,000 is subject to the Higher Rate (40%) which equates to £4,000. If, however, you could afford to simply put this money directly into a pension, this £4,000 would be saved in tax and, instead, go towards growing your retirement fund. Over 5, 10 or 20 years of compound interest, this could represent some significant growth. Be careful not to miss out on the financial opportunities available to you via your pension. Speak with a financial adviser if you think you could make better use of your allowances in the 2021-22 tax year, and beyond.
Conclusion & invitation
If you are interested in discussing your own financial plan or pension strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585