The infamous National Insurance rise has largely dominated the headlines in both the mainstream and financial media. Look closer, however, and you’ll find all kinds of tax increases both direct and indirect. At the same time, average inflation is forecast to reach almost 8%.
In other words, the chancellor was clearly expecting the road out of COVID19 (and Brexit) to be a rocky one. With the recent government changes, this could all become a different story, however, it’s a good idea to be prepared and with that in mind, here are some tips to help you prepare for it.
Marriage/civil partnership allowances
If you’re married or in a civil partnership then make the most of the financial opportunities it gives you. Assuming one spouse/civil partner earns more than the other, the higher-earning spouse can transfer their wealth to the lower-earning one.
There are several ways this can be done. Possibly the most obvious are income transfers, asset transfers and making pension contributions. Even though these may be on a fairly small scale, they can still make a meaningful difference to your overall finances.
ISAs
ISAs come in many forms. The four main ones are Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs and Junior ISAs.
Cash ISAs and Stocks and Shares ISAs
Cash ISAs are available to anyone over 16. Stocks and Shares ISAs are available to anyone over 18. Many providers offer a combined Cash and Stocks and Shares ISA to create a single, supercharged savings and investment account.
Interest and/or dividend income held in a Cash or Stocks and Shares ISA is sheltered from tax. You can withdraw it at any time without government penalties. You can also replace what you withdraw within the same tax year.
Lifetime ISAs
Lifetime ISAs are essentially government-supported savings accounts. Each year, the government will top up a person’s savings with a 25% bonus up to £1K. This money can only be used to pay for a person’s first house or their retirement. If you withdraw the money for any other purpose, you will be charged a 25% penalty on the whole amount.
Using LISAs for pension savings is a very thorny issue. If you’re considering it, it’s definitely best to get financial advice. Using LISAs to save for a house can make a lot more sense. You do, however, need to be confident that you can lock away the money for that purpose and no other.
Junior ISAs
If you have children or even support other children in the family, then paying into a Junior ISA is a very tax-efficient way of saving for them. The caveat here is that the money becomes theirs completely on their 18th birthday. Children aged 16-18 can have a Cash ISA in their own name plus a Junior ISA. This makes for even more tax savings.
Pensions
The big disadvantage of pensions is that they lock away money until you retire. The big advantage of them is that pension contributions are made out of gross income. This means they are very tax-efficient, particularly now.
If you’re a qualifying employee, you can receive contributions from your employer. You may also be able to use salary sacrifice to boost your pension and lower your tax bill.
Mortgages
You may want to look into an offset mortgage instead of a traditional repayment mortgage. With offset mortgages, you keep your mortgage and savings with the same institution. In addition to making repayments, the balance of your savings account is used to offset the amount you owe on your mortgage.
In other words, you give up interest on your savings but pay less interest on your mortgage. This could be a useful way of hedging against interest-rate increases without committing to a fixed rate. It can also lower your tax bill since you won’t be charged on interest income you don’t get. This could become very relevant if inflation remains stubbornly high.
It is important that you speak to a professional, please do get in touch for further advice.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
