Many people leave tax planning to the last minute. But if you’re not like most of people, and you instead prefer to plan ahead, there are several benefits to sorting your tax out early.
Early Birds
As the great English author, Charles Dickens, once said:
“Never do tomorrow what you can do today. Procrastination is the thief of time.” Dickens was never a fan of leaving everything until the last minute. But procrastination can also be related to many other area of our lives, not just time. In fact, we believe procrastination can be one of the biggest thieves of wealth.
For instance, you can take advantage of two significant investment opportunities if you begin organising your tax arrangements from the beginning of the tax year (6 April onward).
The first is merely more market experience. Approximately 70% of the time, stock markets rise. Procrastinators may miss a year’s worth of those upward days. For context, your overall return might be cut in half if you miss just ten of the market’s greatest trading days.
But what about that 30% of the time when markets go down?
The second option is to consistently drip-feed your money. This is known as “pound cost averaging,” and it basically means that if markets decline, you are purchasing a dip. It’s a methodical technique that can smooth out some of the financial markets’ intimidating increases and falls.
Wrapping your taxes
Utilising tax-efficient saving wrappers is typically the first step if you decide to set up your tax affairs early.
We use the term “wrapper” because you’re taking an investment that may otherwise attract tax, and wrapping it to insulate it from Income or Capital Gains Tax.
Practically speaking this is what it entails:
- Consider maximising you and your family’s Individual Savings Account (ISA) allowances, which are £20,000 for adults and £9,000 for those under 18.
- Consider transferring any unwrapped investments into an ISA. You can achieve this by making two concurrent transactions in a “bed and ISA,” as the experts refer to it.
Clearly, ISAs are a way to improve the efficiency of an investment result. Always choose one after deciding to invest before deciding whether to use one. Though, it is important to remember that efficient does not equal bulletproof.
For instance, we occasionally have to inform clients that they could need to pay more in taxes. We’ve dealt with a lot of people over the years who have protected their money with every feasible and useful tax wrapper, but there is still some unwrapped capital left behind.
We assist individuals in choosing the alternative that is least terrible on these occasions. For instance, paying Capital Gains Tax (CGT) is less costly than paying Income Tax: at a simple level, 20% against 40%.
However, there is virtually always something that can be done for the majority of clients.
A bad surprise can also be avoided by making these (often unpleasant) decisions as early in the year as possible.
Acronyms and VCTs
There are other tax wrappers to consider. Some early adopters may find that two of them are appropriate as they think about their tax planning.
- Venture Capital Trusts (VCTs) offer up to 30% income tax relief and dividends from the underlying investments are tax free. You can invest up to £200,000 in them in a single tax year and get a tax relief of up to £60,000. However, you must continue to invest for five years. Many UK businesses, like Pure Pet Food, have benefited from the capital infusion brought on by VCT investments.
- Enterprise investment schemes (EIS) also provide up to 30% income tax relief; you can postpone any prior capital gains and avoid CGT when you quit. But you have a three-year holding period for the investment. One business that benefited from this programme is Loch Fyne Oysters.
These plans, however, call for investments in early-stage businesses that might not survive. Additionally, they may be very complex.
For instance, EISs require the investments you make must be in UK companies not listed on a stock exchange. You may lose your rewards if a company’s circumstances change to the point where they are no longer eligible for EIS investments.
A new tax law
A new modification to CGT allowances provides even another reason for beginning early and planning ahead.
Before CGT took effect, you could get gains of up to £12,300 for years. This April 6, 2023, that decreases to £6,000. Once more halving to £3,000 begins on April 6, 2024. If you must realise a capital gain, and possibly trigger CGT, and you can’t do it in what’s left of the current tax year, then better to do it next year.
And if you’re going to do it the following year, it’s best to start early to guarantee that your plans are in place for the remainder of the year and that you are prepared for tax year 2023–2024 when it comes around.
Need help?
Our advisers would be happy to help you with all your tax planning needs. Book your free initial consultation today.
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