Phew, January’s over – we made it! We’ve had a busy month, not helped by Covid knocking on the door and inviting itself in. But we’re over that now and things are looking up. As we approach the end of the tax year, here’s 7 things you should think about to improve your personal finances.
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Income Tax and Personal Allowance for High Earners
Has your income crept above the £100k mark – whether that’s because of a bonus, or a new job or significant pay rise? Do you know you start losing your personal allowance now?
For every £2 you earn over £100k, you lose £1 of your personal allowance. And so if you earn over £125,140 you don’t earn any money tax free.
Not only that, but if you have children, once you earn over £100k, you no longer qualify for the 20% help from the childcare account. Even if you earn £100,001 and your partner is unemployed. It’s gone – tough. But your next door neighbours could both be earning £99,999 and they still qualify. Seem unfair, doesn’t it – but what can you do?
You have two main options:
Option One – make a personal pension contribution. The gross amount of your personal pension contribution is taken off your earnings total.
Option Two – make a charitable donation.
Example: If your total earnings are £110,000, your personal allowance will be reduced by £5,000 and you won’t qualify for help with childcare. If you make a personal pension contribution of £8,000, your pension will claim back a further £2,000 of tax relief. This brings your gross pension contribution up to £10,000. This is then taken off your earnings, bringing your adjusted earnings back to £100k – so you keep your full personal allowance and tax free child care help.
The added benefit is when you complete your self assessment, you will get a further £2,000 of tax relief and so the £10k pension contribution will effectively cost you £6,000, as you have received tax relief at your highest rate of 40%.
A charitable donation works in the same way, but without the additional tax relief. You would need to pay £10k out of your pocket, to a charity of your choice.
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Use Your ISA Allowances
You have until 5th April to use up as much of your £20,000 ISA allowance as possible. If you don’t use it, you lose it. This simply shelters the money from tax. If you have plans for the money in the next couple of years, you should consider holding it in a cash ISA. If not, however, why not consider a stocks and shares ISA?*
It can go up and down in value, but by investing for a long time (at least 5 years minimum) you should have a really good chance of beating both cash returns and inflation. If you fancy it, get in touch.
If you already have an ISA open, you can top it up (subject to your £20,000 annual allowance). Realistically, this should be done – at the latest – a few days before the end of tax year to be sure it is in your account in time.
If you have a Lifetime ISA – your allowance for it is £4k, which the government tops up to £5k. It’s too good to miss out on. Remember, if you use your full LISA allowance, you only have £16k remaining for your Stocks & Shares or Cash ISA.
If you’re saving for your children in a Junior ISA, you can contribute up to £9k in this tax year.
These are all “Use it or Lose It” allowances.
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Review Your Cash ISA
If you’re saving for something which you plan to buy in the next few years – like a house move – you should be keeping your money in cash. But is a Cash ISA the way to go? What interest rate is your Cash ISA paying you?
Chances are it isn’t keeping up with savings accounts even though they are only typically paying a maximum of 0.7% for an easy access account right now. Especially if it’s an old cash ISA, you probably had a bonus rate which is now gone. You might not even be making 0.2%!
Consider this: You have a Personal Savings Allowance of £1,000 which can be earned from interest if you are a non or basic rate tax payer before tax is payable. This decreases to £500 if you are a higher rate tax payer. If your savings account pays interest of 0.7%, you would need to have £142,857 in the cash savings account already before you had any benefit of tax-free interest in a Cash ISA. If you are a higher rate tax payer, you need £71,428 in a cash savings account before the Cash ISA has any tax benefit.
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Review your Pension Contributions
According to this report, pension tax relief cost HMRC £41,3 billion in 2019-20. Make sure you are getting your fair slice of it. If you haven’t already done so, review your pension contributions. The minimum contributions through auto enrolment probably won’t be enough to provide the retirement lifestyle you are looking for. If you can afford to do more, do it! You are the one who will benefit in the long run, and the minimum contributions really aren’t going to provide for the comfortable retirement you probably want.
Make sure you are getting the full matching contribution from your employer if they offer it. Increase your contribution if you can afford to and explore the option of doing it through your workplace scheme via salary sacrifice to get an added bonus.
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Beware of the High Income Child Benefit Tax Charge
If you, or your partner, earn over £50k and are claiming Child Benefit, you need to be careful. There is something called the High Income Child Benefit Tax Charge, where those who earn over £50,000 per annum lose their child benefit. For every £100 you earn over £50k, you pay a charge equal to 1% of your child benefit received. Once you earn over £60k, you aren’t entitled to child benefit. This is equally true if mum earns £60,000 and dad earns nothing, they will lose all child benefit, whereas if mum and dad both earn £49,000 each, they can still claim full Child Benefit. It’s a completely fair system – isn’t it?
Consider making an additional pension contribution to get around this. For example, if you are set to earn £52,000 this year, you could make a gross pension contribution of £2,000 to bring your Adjusted Net Income below the threshold, and then you won’t lose any.
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Review Your Monthly Savings
Something I always talk about is to “Pay Yourself First.” This means that as soon as you get paid, you set up a transfer to pay £500 per month into cash savings account or your stocks and shares ISA. If you’ve been doing this, brilliant. But how often do you review how much you pay yourself? Are you worth a pay rise?
I believe that if you are saving money, for it to be as effective as possible, it should hurt you a little bit. After all, no pain no gain! What I mean by this is if you are comfortable saving £500pm to the point you don’t even notice it, increase your payment to £750. Keep increasing until you start to notice the money missing from your account. If it makes you think twice about buying something you don’t need, you have your monthly pay just right!
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Review your back up plan
Maybe you’ve moved house this year, or maybe you’ve had children, or maybe you’ve changed job. Any little change in your circumstances should make you review your back up plan. Three protection policies almost everyone should consider are
- Mortgage Protection – a policy which will pay out enough to pay off your mortgage on your death or diagnosis of a critical illness
- Life & Critical Illness Cover – a policy which will pay out a lump sum, hopefully in trust, for your husband/wife/children on death or diagnosis of a critical illness
- Income Protection – a policy which will pay you out a tax free income after you’ve been unable to work for a certain time frame (normally 3 or 6 months).
I hope these will all be the worst investment you ever make. By that I mean, you pay all the premiums but they never pay anything out. However, if anything happens to you where they would pay out, they very quickly become the best investment you ever made.
It isn’t good enough to just put them in place and forget about them. You should regularly keep them under review to ensure they are sufficient, and make sure they are in trust. If you haven’t a clue what a trust is or why you need your life cover in one, call us now!
Your One Page Financial Health Check
We have created a One Page Financial Healthcheck which might be useful for you (or your family and friends) to start to keep this under control.
If you have given these areas of your finances a spring clean, you shouldn’t have too many worries until something changes and you need another regular check up!
*Please note that past performance is not a guide to the future, the value of an investment and the income from it could go down as well as up. You may not get back what you invest.
^^This communication is for general information only and is not intended to be individual advice.