Insulate your money this winter
First published 19 January 2015 • Updated 25 July 2017
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.
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. We may have a piggy-bank mindset, assuming that what we put in, stays in. But money doesn’t work that way. It 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. Our latest research predicts that UK households will lose a total of £4.9 billion this year in unnecessary tax, by not addressing straightforward issues.
Is your money as snug as it could be?
The cash ISA
If you have an ordinary cash savings account and don’t make withdrawals, the actual number of pounds in it won’t go down of course. But the value of those pounds will still decrease, because of inflation. To offset this loss, savers look for accounts with a good rate of interest. The trouble is, in a normal savings account, the interest you earn is also taxed. So the true value of your savings may still be leaking away, or at best growing only slowly.
A cash ISA ‘wraps up’ your money so that no income tax or capital gains tax is charged on any increase in the value of your savings. You may well already have one or more, but are they the best they could be? Providers may reduce interest rates from their original levels. Also, see if you are able to make full use of your annual allowance – this is currently £15,000 and set to rise to £15,240 for the 2015-2016 tax year. It’s 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 what is effectively free money. So it’s astonishing that around 4.2 million UK adults currently in employment are not saving into a pension, meaning that around £2.9 billion of pension tax relief will go unused this year.
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, as they will probably be more tax-efficient there.
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 indeed. 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 £550 million is expected to be wasted through unnecessary IHT payouts. The main problem here is that estate planning is such a complex area, it is very difficult to achieve tax efficiency here without the help of a professional adviser. Taking the DIY approach can lead to all sorts of gaps and omissions, such as failing to place life protection policies under trust (which can reduce a £100,000 life insurance payout by as much as £40,000). It seems that most people are conscious of this – only 22 per cent of those we surveyed said they were happy to tackle estate planning without professional advice. Nevertheless, the wastage figures suggest that too few people are getting the quality of advice they need to keep their money from flying out of the window.
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. Book yours today.
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