It’s a new tax year and the best time to review your new year finances
Every year people make new year resolutions and every year people give up on those resolutions pretty quickly. But this isn’t a new calendar year, it’s a new tax year here in the UK.
Taking some time now allows you to start thinking about your new year finances and what you want to achieve in the next 12 months.
And now is a great time to review your past tax year and get in the best financial shape for the new tax year. What can you learn from last year? What went well? And not so?
Looking at your finances, what do you need to change? What do you need to do to make sure your finances are in the best order for what you want to achieve in this new tax year?
Review Last Year
Lets look at last year first of all. Just because the year has ended doesn’t mean you can forget all about that tax year. There are actions you may need to take this year which concern last year.
Also looking at last year can help you understand what you need to do this coming year.
Self-Employed & Self-Assessment
If you are self employed then you won’t have started your self assessment yet. I am not advocating starting this right now however I am keen on people getting on with this within a couple of months. Don’t leave it until next January.
Why put that kind of pressure on yourself? You don’t have to pay your outstanding tax there and then but at least you’ll know what your tax bill is going to be.
Action – consider completing your self assessment for last tax year early
If you are a 40% tax payer and you have paid into a personal pension or SIPP then you will need (and want!) to re-claim the additional 20% tax rebate that HMRC offer.
Pension providers can claim 20% tax on your behalf from HMRC but you need to claim the other 20% via the self assessment process.
Another reason to not leave it until January next year. This is free money which you will want to have in your pocket, not leave it with HMRC!
If you aren’t registered for self assessment then you can write to or call HMRC in the first instance. You may be brought into the self assessment process for future years but do check with them first.
Action – review last years pensions contributions and if 40% tax payer, claim the further 20% back from HMRC.
Double check your total earnings and that of your spouse. If one of you earned less than the personal tax allowance last year (£11,500 for 17/18) then you could give up to £1,150 of the lower earners allowance to the other person.
This would save up to £230 in tax for the higher earner. The qualifying conditions are:
- Married or in a civil partnership
- One of you earns less than £11,500
- The other earns less than £45,000 (£43,000 in Scotland)
You can backdate your claim for marriage allowance as far back as 6th April 2015 if the above conditions apply for each tax year. You can apply online.
Action – review your Marriage Allowance eligibility for last tax year and apply if applicable
Personal Savings Allowance
Since April 2016 savings interest has been paid gross not net of tax. This means you might be required to pay tax on some of this interest depending on how much you have earned.
Most people have a personal savings allowance of up to £1000 per year (see eligibility criteria below) so it’s likely only if you have received more than £1000 in interest that you are going to have to pay tax on it.
The personal savings allowance covers interest from different sorts of accounts including:
- savings accounts
- current accounts
- credit union accounts
- Peer to Peer taxable accounts
It does not include any interest you receive inside an ISA wrapper e.g. Cash ISA or IFISA or Premium Bond prizes. For the full details see here.
The eligiblility criteria for the personal savings allowance is:
Income band (adjusted net income)
Personal Savings Allowance
Up to £43,500
Up to £1,000 in savings income is tax-free
£43,501 – £150,000
Up to £500 in savings income is tax-free
No Personal Savings Allowance
If you earned more in interest than your personal saving allowance limit then you do not need to do anything. HMRC will pick up on this during this tax year and amend your tax code accordingly.
However reviewing the interest you have received in conjunction with your spouse now allows you to maximise your personal allowances for the new tax year.
If you are a 40% tax payer but your spouse is not then it could be to your tax advantage to put more of your savings in their name. That way you will gain from tax free interest of £1000 in their name and £500 in your name.
Action – review interest received by you and your spouse and your eligibility for the Personal Savings Allowance, consider moving money around to maximise your tax free interest.
Plan For the New Tax Year
Think about how much you plan or hope to save. Work out your new year finances and where it would be best to save by creating your savings goals.
Having savings goals for the coming year will help you identify how much money you have to save and where you want to save it to.
If you don’t have any savings goals any excess cash you have is very likely to disappear from your bank account in a haze of free spending.
Pay yourself first by creating your savings goals and setting up automated payments so the money leaves your bank account straight after you get paid.
Action – Pay your future self first by setting your savings goals and setting up automated payments.
Self-Employed and Self-Assessment
If you’ve been self employed for a year or more you’ll already be in the system of paying your tax in advance.
Action – Make sure you know when your self assessment payment is due in July and adhere to the deadline.
Self-Employed Tax Savings Account
If you haven’t already, set up a separate savings account to pay a % of your earnings in every time you get paid. You’ll soon build up a pot that will cover your July and January payments along with any accountancy fees you plan on incurring.
If you were employed you’d have that cash deducted form your wages anyway so put it into the savings account and don’t touch it for anything other than your tax affairs.
Action – set up a savings account purely for your self employed tax affairs.
You’ve already done the math for last year to check what you and your spouse earned. Now using that as your basis guesstimate if you will be able to claim it for this year as well.
Action – Apply if you are going to be eligible for the marriage allowance
Personal Savings Allowance (PSA)
Again you’ve already done the work for last year so apply the information you have gained to your new year finances.
Think about whether you’ll be building your savings up further. If so, in whose name would it best sit? Are you planning to use your tax free allowances as well (ISAs)?
Action – Refer to your savings goals to identify whether you will be using your Personal Savings Allowance.
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Individual Savings Allowance (ISA)
Each person can save up to £20,000 of new money in ISAs each year. This £20,000 can be split between a Cash ISA, Stocks & Share (S&S) ISA and an Independent Finance ISA.
You can open a new one of each type of ISA but not two of the same.
Action – refer to your savings goals to determine what savings vehicles (including ISAs) you will be using to save into this year.
You do not need to wait until the end of the tax year in order to put your money in your ISA/s.
Indeed it would make sense, if you have the money available, to be putting it in at the beginning of the tax year as you’ll receive more interest/investment gain during the year.
Obviously if you don’t have £20,000 knocking around at the start of the tax year then this is a moot point.
However remember to pay yourself first.
If you plan on paying £200 into your S&S ISA every month then do so, don’t wait until March 2019 to pay it in as a lump sum. You’ll have missed out on almost a year of investment growth and dividends.
Action – pay into your ISAs regularly, don’t wait until the end of the tax year.
Maturing Cash ISAs
Most people lock away their money in fixed rate Cash ISAs to earn a few more pence in interest. Locking away your money for 2 or 3 years is good but you must remember to do something with the account when that fixed rate matures.
Most Cash ISAs can drop as low as 0.01% after maturity. You want to move your money by transferring it to another higher paying Cash ISA as soon as it matures.
Sometimes your existing ISA provider will offer you another product which may be as good as or better than what else is on offer. Always do your homework though to ensure you are getting the best rate for your money.
Action – check your ISA maturity dates and note your diary to take action and review rates.
Savings & Current Accounts Cash
Are you getting the best rate of interest for the cash you have saved? If you have chosen to keep cash as cash rather than in an investment account then you will want to get the very best rate to have a chance of keeping near to inflation.
Inflation is currently 2.7% which can be beaten with cash savings but you have to keep on top of your accounts to ensure you earn this.
Regular savers give you the opportunity to earn up to 5% – see below for more information.
Current accounts are another place where you can earn more than inflation. Nationwide, Tesco and TSB all currently offer current accounts paying more than 2.7%. Some are fixed term (e.g. Nationwide) and some may require multiple direct debits (Tesco requires 3).
Action – review your savings and current accounts today and check what interest rate you are getting. Are there any maturity dates you need to plan for?
Maturing Regular Saver Accounts
You may have money in other savings accounts which have a maturity date. A good example is regular savers. These are often only for a 12 month period and revert to a low paying instant access account on maturity. Again likely interest rate after maturity can be as low as 0.01%.
Depending on who your regular saver account is with you can often set up a new 12 month regular saver immediately e.g. both Lloyds and HSBC offer this.
Action – check your regular savings account and take action on maturity.
Other Savings Accounts Changing Their Terms & Conditions
You will usually get some notice if one of your accounts has a change in its terms & conditions and this notice isn’t usually tied to the tax year start.
However it’s always good to review your accounts and if there are any impending changes, make a plan to ensure your savings don’t get left on the shelf at 0.01%.
For instance I opened a best buy instance access savings account with Ulster Bank last year. In February this year I was informed that the interest rate was dropping to a very un-competitive rate.
I have been drawing down this account to fund my regular saver accounts and will be closing the account this month.
Similarly Tesco savings accounts used to operate deposits via direct debits which was very handy for bank account switching. However the T&Cs of this account changed this month so I will be closing my account with them as it doesn’t pay particularly competitively.
I only used the account for the direct debits it offered so no longer have use of the account in its own right.
Ongoing action – review your savings accounts when T&Cs are changed and close those you no longer need.
Pensions are an integral part of your planning for your future self. If you don’t have a pension you could end up relying on the State Retirement Pension which is at most £159.55 per week. You must have at least 35 years worth of contributions.
If you were contracted out in previous years (usually because you had an employer offering their own more generous pension scheme) then you may end up with less.
Can you afford to retire on just £159.55 per week?
If not you need to be planning now for your old age, regardless of how young you may be. Your planning might not involve paying into a pension this year, perhaps you are in debt or are on maternity leave.
But plan you must. Otherwise before you know it you’ll be 50 without a pension. Not a good place to be.
Related reading: Early Retirement – The Finish Line is Near
The government have taken some steps to tackle the problem of pensions by introducing the workplace pension which requires all employers to set up a scheme and auto enroll everyone eligible into the scheme.
The amount you are required to pay in is very small but it is better than nothing. Your employer also has to pay on your behalf so this is free money for you.
If you have a workplace pension then the contribution you must pay has just gone up to 3%. In addition your employer now has to pay a 2% contribution.
From April 2019 your contribution will increase to 5% and your employers will be 3%. Don’t waste the free money on offer from your employer.
Action – make sure you are enrolled in your workplace pension scheme.
Other Employer Pension Schemes
Workplace pensions should not be confused with a Defined Benefit or Defined Contribution pension scheme which usually involves higher contributions by both yourself and/or your employer.
Do you know how much your pension is going to be when you hit your scheme pension age?
Most pension schemes provide a benefits statement which show you how much you could get when you retire. These are only projections but are useful for your pension planning.
If you haven’t received a pension benefits statement for some time ask for one.
You will want to review what you are likely to receive as a pension. Is this enough for you to retire on? Remember you should be eligible for a state retirement pension as well.
Is the sum total of these pensions enough for you to retire on? If not you need to do something about it.
Action – request a pension benefit statement and review your likely payments
Your current pension scheme may allow you to increase your contributions either by monthly payments or a lump sum.
Open a New Pension
Alternatively you might want to consider opening a different pension, one where you are in control of what it is invested in and when you can access it. Currently you can access a personal pension or a Self Invested Personal Pension (SIPP) when you are 55.
The government has announced plans on changing this to state retirement age minus 10 years. However this is still significantly earlier that the state pension, workplace pensions or other employer pensions.
If you are a 20% tax payer and want to pay say £100 a month into your SIPP, you pay £80 in and your scheme provider will claim the other £20 from HMRC and credit it to your account. That’s £20 of free money from the government.
However if you are a 40% tax payer then extra payments you make into a pension will only cost you 60% of the gross figure.
For example if you want to pay £100 a month into your SIPP, you actually pay just £80 in. Your SIPP scheme provider will claim £20 from HMRC.
As a 40% tax payer you will then claim another £20 back from HMRC at the end of the tax year. So a £100 payment into your pension will only cost you £60 – what a bargain!
Planning your finances carefully could help you pay more into a pension scheme of your choice and ensure you have enough money when you retire.
Action – time spent now reviewing your current pensions and planning extra pension payments has the potential to make a huge difference to your retired life.
If you have a spouse/partner then it may be beneficial to review your pension arrangements together. After all if one of you is a 40% tax payer and the other is not, it could be more tax advantageous to pay into the pension of the 40% tax payer rather than the 20%.
However you do need to ensure your finances are balanced and you are not putting the 20% person at a financial disadvantage.
Serious discussions including wills and death benefit nominations should be had as part of this type of financial planning!
Getting your financial house in order at the start of the year sets you up such that you can concentrate on other things in your life.
To make the most of your hard earned money, you need to control what happens to it and where you put it. You certainly don’t want to leave your money in accounts paying 0.01%.
Review last years finances
- Review last years pensions contributions and if 40% tax payer, claim the further 20% back from HMRC.
- Consider completing your self assessment for last tax year early
- Review your Marriage Allowance eligibility for last tax year and apply if applicable
- Review interest received by you and your spouse and your eligibility for the Personal Savings Allowance. Consider moving money around to maximise your tax free interest.
Review your new year finances
- Pay your future self first by setting your savings goals and setting up automated payments.
General Tax Affairs
- Make sure you know when your self assessment payment is due in July and adhere to the deadline.
- Set up a savings account purely for your self employed tax affairs.
- Apply if you will be eligible for the marriage allowance
- Refer to your savings goals to identify whether you will be using your Personal Savings Allowance
- Refer to your savings goals to determine what savings vehicles (including ISAs) you will be using to save into this year.
- Pay into your ISAs regularly, don’t wait until the end of the tax year.
- Check your ISA maturity dates and note your diary to take action and review rates.
- Review your savings and current accounts today and check what interest rate you are getting. Are there any maturity dates you need to plan for?
- Check your regular savings account and take action on maturity.
- Ongoing – review your savings accounts when T&Cs are changed and close those you no longer need.
- Make sure you are enrolled in your workplace pension scheme.
- Request a pension benefit statement and review your likely payments
- Time spent now reviewing your current pensions and planning extra pension payments has the potential to make a huge difference to your retired life.
Phew, that looks like a lot to get through. However you may already have most of the above under control and some of them may well not apply to you.
Taking the time now to review your new year finances, your savings goals and your tax allowances will set you up financially for the rest of the year.
Did you set savings goals last year? How did you do? Will you be setting goals this year?