Maximising your tax efficiency is vital – but beware sneaky fees
IT’S A new year and, in the financial world, our thoughts are turning to the next big milestone – the end of the tax year. Running from 6 April every year, an arbitrary date, the “TYE” has a history packed with calendar blunders and political-religious significance. Aside from the guts and the glory, it also marks the date by which we must get our tax affairs for the year in order.
Here at Nutmeg, we always experience a huge rush of investors wanting to sort out their Isa and pensions just before the tax year ends. But (excuse me putting my teachers hat on here) there are real benefits to ensuring that you’ve got your tax efficiencies sorted out early, so try not to leave it until the last minute!
ISA INTELLIGENCE
An effective way most people can save tax is by investing within an Isa. The individual limit, now £15,000, has more than doubled in the past five years, a commitment from the government that helps address the critical savings gap in the UK.
While they are more volatile, in real terms, returns from investments through stocks and shares Isas have outperformed the measly interest rates offered by cash Isas since 2001.
Investing early in the tax year can make a huge difference. People who invest the full amount on the first day of the tax year reap the benefits from compound returns. Compounding was Einstein’s eighth wonder of the world, and over the long term these extra gains can add up to thousands of pounds.
If you don’t have the cash to invest all at once, then regular contributions throughout the year are a more effective way of maximising your returns than depositing a lump sum at the end of the tax year.
I find it shocking that, according to research from Unbiased.co.uk, £154m was paid unnecessarily in capital gains tax last year, largely due to people not using their allowances. There is a need for providers of investment services to be clear about tax, so investors can better inform themselves.
PENSION PREPARATION
Another pertinent topic is that of the ever-growing pensions black hole. Saving into your pension is tax-efficient because you pay tax on the way out, rather than on the way in. This means that, for every contribution you make to your pension, the government will refund the income tax you’ve already paid. I know that investing in a pension can feel like an abstract and irrelevant concept if you’re far from retirement, but it really is excellent discipline.
The key piece of advice I’d give is to check the fees you’re paying. Sneaky fees within pensions can seriously damage your returns. It’s important to understand charges and the impact they can have on your retirement income. A report by the Financial Services Consumer Panel recently found that many people are paying far more than the advertised rate on their pensions. In some cases, this can halve the expected weekly retirement income.
ENTREPRENEUR RELIEF
If you’re a business owner, do make sure you take full advantage of the tax breaks available to entrepreneurs. When you’re raising funds for your business, check out the government’s Seed Enterprise Investment Scheme (SEIS or EIS). It’s aimed at helping small businesses secure the capital they need by offering tax relief to investors – this can be a really big win.
There are also tax breaks available when you sell your business, whether partially or in full, such as Entrepreneur’s relief. This means you’ll pay only 10 per cent capital gains tax when you sell those assets.
Nick Hungerford is chief executive of Nutmeg. www.nutmeg.com