Are you ready for a new year celebration with your finances? The 2022/23 tax year is underway as of April 6th, running to April 5th 2023. This is your fresh opportunity to use your tax allowances and do more with your money.
Here are our top 5 suggestions for getting the new tax year off to a great start.
1. You could use up your ISA allowance
If you’re in the position to do so, the first thing you should consider at the start of the new tax year is using your annual ISA allowance.
You can put £20,000 into an ISA in the 2022/23 tax year. An Individual Savings Account (ISA) is a tax-free savings or investment account. With an ISA, you won’t pay any Income or Capital Gains Tax on the returns your ISA generates or the increase in value.
There are two main types of ISA:
- Cash ISAs, which are linked to a set or variable interest rates
- Stocks & Shares ISAs, which are linked to the growth of investments
Using up your allowance in a Stocks & Shares ISA could be an effective way to combat the current high rates of inflation, as there’s the potential for your investment to grow above inflation. A Cash ISA may not offer the same growth, as interest rates are typically lower than inflation.
Investing the full allowance of your Stocks & Shares ISA today, or as soon as possible, gives you the opportunity for greater growth over the tax year. This is because of compound growth, where your investment can earn growth on growth when left over longer periods of time. It also means more time to ride out fluctuations in the markets.
By contrast, £20,000 in a Cash ISA could be declining in value, as rates of Inflation mean your money buys less in the shops. £20,000 today with inflation at 5% over the next 12 months will only have the buying power of £19,000.
2. You could set up a regular contribution to your ISA
If you can’t invest your full ISA allowance in one lump sum, it could make sense to set up a monthly direct debit.
Doing this enables you to invest into your ISA and use as much of your allowances as possible over the tax year. This way of investing is known as pound cost averaging, as you are slowly dripping your money into the markets. This means you mostly avoid buying at the bottom or the top of the market, you are averaging out your unit price over a year.
Set your direct debit up for the start of the month, right after payday, and think of investing as paying yourself first. Remember, you aren’t really parting with that money, it is going to come back to you potentially in a greater value in the future if markets perform well.
Split equally over 12 months, you can add up to £1,666 per month into your ISA.
3. Something is better than nothing
Remember, something is better than nothing.
Although we’ve covered the idea of using up your ISA allowance in one go or over 12 months, every pound you can add is a step towards reaching your long-term financial goals. That’s why we created impulseSave, so that everyone has the same access to investments – even with just £1.
Topping up your ISA with spare cash is a great way to build an investing habit and start seeing potential growth on your money.
4. Don’t forget your Pension allowance
With your Pension, there is no limit on what you can invest into it within the tax year, but there is a limit on how much tax relief you can claim each year on your contributions. Tax relief can typically be claimed on up to 100% of your earnings or £40,000, whichever is the lower.
Like your Stocks & Shares ISA, it makes sense to use up that allowance as soon as possible, as that money then has a longer period in which it could grow. This is an effective way to pay less tax on your salary, ultimately using that money to grow a Pension pot that will fund a happy retirement.
Don’t forget that although your money is tied up for longer in a Pension, you will get 20% added to every contribution by the government in the form of tax relief.
5. Speak to a financial adviser
You have until April 5th 2023 to use your new allowances. If you have any concerns or questions then speak to a financial adviser today and think about how you can do more with your money in the coming twelve months.
With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal recommendation or financial advice.
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