Want An Extra £250k+? Get Your Tax Plan Timing Right

It’s a new year. No, we’ve not only just come around from a 5-month January hangover, we’re talking about the tax year.

And while for many people, it’s just another date that comes and goes (and perhaps leads to the start of the nagging accountant emails for your self-assessment), to people like us at Rosecut, it’s a time for action.

Because while, yes, you have the whole year to take advantage of tax allowances and structure your money, the sooner you do it, the better.

In this article, we’re going to run you through a checklist of the items you need to tick off your financial to-do list when a new tax year rolls around. The sooner, the better.

• Use your annual ISA allowance

• Review business salary and dividend withdrawals

• Check your pension contributions

• Plan asset disposals for CGT purposes

Use your annual ISA allowance

This is a no-brainer, but it can be easy to get a little complacent around the timing of it. Before we get into that, should you even both with an ISA at all? Is £20,000 a year really going to help you gain financial freedom anytime soon?

Well perhaps not on its own, but regardless of your level of income or wealth, an ISA is an account you should not be sleeping on. And actually, if you start early enough, becoming an ISA millionaire is achievable for just about anyone.

And there’s actually a big difference between being organised and getting this allowance used at the start of the year, or waiting and doing it at the last minute at the end of the tax year.

By contributing early in the tax year, you’re giving yourself a full 12 months of potential additional returns. If you do this every year, that’s a relatively modest annual figure that can add up over time.

And what does it add up to? Come on, if you’ve been here for a while you’ll know we don’t just sick to the theoretical. We’ve run the numbers.

At an average annual return of 6%, contributing your full ISA allowance at the start of the tax year, as opposed to the very end, nets you an extra £65,837 over a 25 year period. Sure, that’s not the difference between a Volkswagen and a Lamborghini, but it’s £65k you wouldn’t have had otherwise, through nothing but timing of your contributions.

Elephant in the room? Markets don’t always go up. That’s right, sometimes you’ll contribute early only to see markets tumble. It happens. But, markets go up more than they go down, meaning on average, the maths still works.

Review business salary and dividend withdrawals

Are you an employee who doesn’t run their own business, even on the side? You can skip this one. But for the self-employed, this is super important.

To maximise the tax efficiency of your personal and company tax, you need to review how you’re taking profits every year. It’s rare for personal and company tax rates or thresholds to both stay completely unchanged in a given year, so it’s something you need to look at every time a new tax year rolls around.

This year we’ve seen a big change with the company tax rate going from 19% to 25%, though a tapered rate applies to businesses with profits up to £250,000. Dividend allowances for individuals have dropped as well, going down to just £1,000 per year.

Even in years where there aren’t major changes to the tax system, your business may have changed. The financial structure that made sense when your company profits were £200,000 may not make sense when those profits are £2m.

The specifics are something you need to review with your advisor, but the point is, you need to review them.

And it’s not just for tax reasons. From a personal perspective it’s important to bring in aspects of financial planning as well. For example, say you’re considering taking out a mortgage later in the year. It may not be a problem for you to have a low salary and high dividends, but maybe it will be. 

Knowing where you stand up front will allow you to avoid any potential surprises down the line, and help you understand how much tax you need to set aside throughout the year.

Check your pension contributions

This is another area the government loves to tinker with. Pension contribution allowance limits have changed again this tax year, now going up to as high as £60,000 (depending on your income) from £40,000 in previous years.

For people looking to gain financial freedom, a SIPP or pension is another account which you can’t ignore. And missing out on £20,000 worth of contributions, just because you didn’t double-check the details, can make a big difference over the long term.

And yes, you could rush in a last minute contribution at the end of the tax year, but you’ll miss out on a whole year of potential gains, just like you do with an ISA.

In fact, because the annual allowance is £60,000 rather than the £20,000 you get for an ISA, the difference is even bigger. Over 25 years, getting your contribution in at the start of the year could add £197,512 to your pension pot.

So between the early ISA and pension contributions, you’re looking at over a quarter of a million pounds in additional funds. Not too shabby at all.

Plan asset disposals for CGT purposes

Depending on your asset base, this one could save you a fortune. Capital gains tax can be pretty brutal, but if you plan ahead it is possible to minimise its impact. 

You might think that there’s not a lot you can do when it comes to selling an asset you’ve made a gain on. You’re going to have to take the hit and give HMRC their cut. While that’s true to an extent, there are almost always ways you can better manage the position.

Here are some examples:

Split the sale

Depending on the type of asset, you might be able to split the sale across multiple tax years. For an investment portfolio or some company stock, for example, you could sell half of it on April 1st 2024 and the other half on April 7th 2024. 

That means you’ve got all the cash within a week, but the gain is split across two tax years. It means utilising two years worth of the £6,000 tax-free CGT allowance, and (more importantly) may also avoid bumping you up a tax bracket.

Of course you can’t do this with every type of asset (like real estate), but it's definitely worth considering and planning for.

Transfer to your husband or wife

Assets can be transferred between husband and wife without triggering a capital gain. That means that if you’re holding an asset with a big gain on it, you can potentially transfer half of that asset to your husband or wife, and not pay any tax.

When you then subsequently sell it, the gain is split between the two of you. That means that again, you have access to two CGT allowances and reduce the likelihood of the gain pushing you into a higher tax bracket.

This is particularly valuable if one partner earns a lot more than the other.

Now it’s not always so straightforward, depending on the asset. On real estate, for example, you do still have to pay stamp duty on the transfer, which could wipe out the tax savings. You might be starting to see a pattern here of why we don’t like real estate investing!

Take losses

Any capital losses you suffer can offset gains you’ve made on other assets. So if you’re sitting on a large loss on an investment that you’ve been thinking about getting rid of, the timing of doing it is important.

But planning it out is important, to ensure that you are able to use those losses in offsetting your gains on the assets you’ve had a win with.

All of this comes down to timing. It’s important to lay out your capital gain position for the year, so that you can plan out the most effective way to realise gains throughout the year. Doing this the right way could save you hundreds of thousands of pounds in tax. 

The bottom line

A new tax year gives you a whole new set of tools and strategies to take advantage of. By giving yourself the maximum amount of time possible to use these in the best way, it’s likely to mean a more effective investment plan, which means less tax, which means more money, which means earlier financial freedom.

Makes sense to us.

Want to kickstart your own strategy for the new financial year? Speak to us today.