How to get your personal finances in order before the end of the tax year
Camilla Esmund, senior manager at interactive investor – the UK’s second largest investment platform for private investors.
The below is for educational purposes only and is not financial advice.
As we enter the final week of the 2024-25 tax year, the good news is that investors still have time to maximise their tax-free allowances to protect their wealth from HMRC. The not-so-good news is that many savers and investors don’t seem to be aware of this, and the clock is now ticking.
With the financial landscape becoming ever more complex, the lack of awareness is not a huge surprise. But there are ways that investors can feel more in control at this time of year and keep more of their money – and this is only ever going to get more important.
The core reason for why tax year end is becoming ever more crucial is due to ‘fiscal drag’ which refers to the stealthy effect of frozen tax thresholds while wages rise – literally dragging more of us into a higher tax bracket. This can easily go under the radar, causing a bit of a shock when you see your payslip. With tax thresholds frozen until 2028-29 – and a real possibility the deep freeze will be extended (but we will have to wait and see), this phenomenon isn’t going away any time soon.
I’m also writing this during so-called ‘bonus season.’ Bonuses are taxed as regular income, potentially pushing you into a higher tax bracket, so this is something to bear in mind, as it may also cause a bit of a surprise and disappointment if you end up with less than you expect.
The Spring Statement
While changes to the tax system were a welcome omission from Rachel Reeves’s Spring Statement, the UK’s worsening economic outlook as sparked fears that hikes might be in the offing at this year’s Autumn Budget.
However, the recent increase to capital gains tax (CGT) rates, gradual erosion of CGT and dividend tax allowances, and the aforementioned freeze to income tax thresholds, means are tax bills are already rising.
As it stands, millions of adults risk losing out on key tax-saving opportunities
There’s a paradox here, because even though it’ll only become more important for us all to ensure we’re making our money work harder for us, more of us than ever are feeling overwhelmed by our finances.
In fact, interactive investor research* found that more than half of UK adults (51%) feel stressed when thinking about investing for their future.
The same research discovered that only around one quarter (28%) of UK adults were aware of the upcoming tax year end deadline, despite its importance. Some 17% said they have no idea what the term means, and a further 13% believed it applies only to wealthy people.
So, let’s explore some things to consider before the clock strikes midnight on 5 April.
Individual Savings Accounts (ISAs): use it or lose it
A core pillar to investing is maximising any tax-saving opportunities – helping you keep more of your growth and income.
In a nutshell – with more of us paying more tax – more of us need to be using tax-free allowances.
One of the most significant benefits available to UK savers is the ISA allowance, which currently stands at £20,000 a year. This is use it or lose it – any unused portion can’t be carried forward. ISAs are fantastic tools to shelter long-term investments from both capital gains and dividend tax – so if you’re not maximising these, you could be missing a vital opportunity to protect your wealth from the taxman.
Are you holding investments outside of a tax wrapper?
The CGT exemption allows you to realise £3,000 in tax-free gains every year. Like the ISA allowance, it resets on 6 April and if you don’t use it, it’s lost.
Use pensions to trim this year’s tax bill
You may want to consider adding lump sums to your pension if you can afford to, especially if you pay higher rates of tax. This money will be tied away until retirement, but you’ll get upfront tax relief on those contributions.
On personal pension payments, into something like a self-invested personal pension (SIPP) you’ll get an immediate 25 per cent boost in the form of a government top up and can claim back extra through self-assessment if you earn enough to pay 40 per cent or 45 per cent tax.
As pension contributions lower what’s called your adjusted net income, you might also be able to avoid the High-Income Child Benefit Charge or keep any lost personal income tax allowance.
The cost of delay
Now is the time to take action. The good news it that there’s time to make significant tax savings just by making as much use as you can of the allowances that exist. But with many of these being cut, frozen, or potentially at risk of future reductions, ensuring you act before April 5 is vital.