Insulate your money this winter
First published 01 December 2016 • Updated 19 November 2018
Did you know that we lose most of our savings through our heads? That’s right – because we don’t think about how much unnecessary tax we’re paying. Here are some ways to make sure your money is wrapped up tight, to keep out those (over) draughts. Article by Nick Green.
If your home loses heat, you lose money. We’ve been told that often enough. But many in the UK aren’t nearly as wise about our finances. Money won’t sit in your account unchanged, any more than heat will stay inside a draughty house. In this case, the leaky roof and open windows are inflation and tax. UK households collectively lose billions every year by not addressing straightforward issues.
Is your money as snug as it could be?
With the new savings allowance, you don’t pay tax on savings interest under £1,000 of interest in a single tax year (this figure is only £500 if you’re a higher-rate taxpayer, and zero if you’re an additional-rate taxpayer). This means that for most people, interest on savings will be effectively tax-free (at least until interest rates rise significantly). However, there are still plenty of advantages to using your full cash ISA allowance. The tax protection of an ISA is more complete, the tax-free allowance can be passed on to your spouse, you may get a higher rate of interest, and you don’t have to keep track of the interest. And it’s just simpler – much less stress than installing double glazing.
Cash in the attic is great to have – and a pension’s the most insulated attic there is. No tax of any kind is paid on the investment growth, and in addition you get tax relief on your contributions. This means that a basic rate taxpayer who wants to pay in £10,000 to a pension needs only to pay £8,000, while a higher rate taxpayer needs only pay £6,000. That’s a lot of free money.
What’s more, if you are nearing 55 (the age at which you can access most pensions) then it may be worth moving other savings into your pension, where they will get a huge boost from tax relief.
Stocks and shares ISA
Like the British weather, the equities market can be unpredictable – but when the sun does shine, it can make you very happy. Investing in stock and shares lets you tap into some of that sunshine – so you really sure make sure that what you’ve gained isn’t lost to tax. Capital gains tax (CGT) is chargeable on all growth on assets such as equities – but not if you’re keeping them in a stocks and shares ISA. So if you haven’t used your maximum ISA allowance this year, there’s really no excuse for leaving your shares out in the cold.
Inheritance tax (IHT)
This year around £595 million was wasted through unnecessary IHT payouts. The main problem here is that estate planning is such a complex area, so it is very difficult to achieve tax efficiency here without the help of a professional adviser. Also, rising house prices are drawing more and more people into the IHT bracket. Yet still too few people are seeking the advice they need to keep their family’s money from flying out of the window when they die.
Take a moment to reflect: how much unnecessary tax are you losing right now? The quickest way to find out is with a free financial health check from a regulated adviser. Connect to yours today.
Nick Green is communications manager at Unbiased, the UK's favourite place to find advice you can trust. He has been writing professionally on finance, business and many other topics for over 15 years.
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