The 2020/21 tax year has only just finished and it’s the perfect time to start figuring out the next 12 months. While this time of the year tends to be associated with using up your allowances before the deadline passes, getting a quick head start on 2021/22 can be just as beneficial.
The new tax year began on 6th April, with the weeks before the deadline often used to make financial decisions to use up allowances. From putting money into ISAs, to investing your money through Venture Capital Trusts, using these allowances can help to reduce your tax liability and make your money stretch further. In most cases, leaving decisions until the last minute makes total sense, but there are a number of reasons to build up a plan at the start of the new tax year. Here are 5 of the most crucial:
1. Avoiding Last-Minute Decisions
By leaving your financial decisions until the last second could mean you need to rush around, which could lead to costly mistakes being made or not fully exploring all of your options as you simply do not have the time.
In many cases, how you use your allowances will have a direct impact on your overall finances. If you decided to utilise your pension Annual Allowance, for example, you wouldn’t be able to take out this money until you reached your pension age, which could be 10s of years away. It is critical that you decide how making use of these allowances will affect your short and long term plans. Considering your plan for 21/22 earlier means you will have more time to really think through your options.
2. Don’t Worry About Delays
Occasionally, things outside of your control can have a direct impact on your plans. Delays from providers and other relevant parties are one example. If you choose to invest your cash through an ISA with only a few days to go until the new tax year, there’s an obvious risk that you could end up missing the deadline. If this were to happen, it could mean you’ll pay more tax than you would have.
Deciding how you will use allowances over the next year means you can reduce the impact of delays or other factors out of your control.
3. Spreading Contributions Across The Year
If you plan to save a significant sum of money, whether it is in an ISA, a pension or a portfolio of investments, spreading out contributions across the whole year can make it easier to manage.
The annual allowance for an ISA is £20,000. If you would like to make full use of this, adding £1,650 every month from your income or any other assets can mean it will become part of your regular outgoings rather than a harder to swallow lump sum you would need to find at the end of the tax year.
The same is true for your pension contributions. It is also worth noting that your employer could match or increase their contributions in line with yours, when it is coming direct from your income, however they are very unlikely to do so if the contribution is a one-off.
4. Benefit From Compounding Interest
Spreading out contributions can make managing your finances easier. It could also be financially beneficial. If you are using a cash account, perhaps a Cash ISA, you will receive interest on what you pay in. Depositing money earlier in the tax year, whether you pay regular contributions or a single lump sum, means you have much more time to benefit from any interest. The compounding effect means that the longer your money is saved in an account, your will earn interest on the previously paid interest over time.
We are all aware that interest rates are low, however over time the process could still deliver decent benefits, especially if you are making full use of your allowances.
5. Set Goals
A new tax year provides a great opportunity to review what you want to achieve over the next year and beyond. It will help to ensure your financial plan reflects your wider goals and align with you reaching them.