The start of a new tax year today is a great opportunity to spring clean your personal finances and take control over your financial planning.
In this short article, personal finance expert Martin Bamford from Informed Choice Ltd, a firm of Chartered Financial Planners, offers seven top tips for making the most of your money in this new tax year.
1 - Use your ISA allowance. This tax year sees the introduction on some new rules for Individual Savings Accounts (ISAs). It is now possible to invest up to ?7,200 each tax year into these tax efficient accounts. A maximum of ?3,600 can go into a Cash ISA with the balance of the annual allowance available for use with a Stocks & Shares ISA.
Money within a Cash ISA is free of income tax on the interest. Any investment within a Stocks & Shares ISA is free of income tax and capital gains tax, with the exception of the tax credit on UK dividend income which can no longer be reclaimed.
Your Personal Equity Plan (PEP) account automatically became an ISA at the start of the 2008/09 tax year, so the ongoing administration of your tax-efficient investments potentially just got a whole lot easier.
Martin says: "The new ISA rules create a great opportunity to maximise your tax-free savings allowance, but also to review any existing ISA and PEP portfolios. Now is a great time to check how your ISA portfolio is performing and ensure it is invested in line with your investment risk profile."
2 - Give some money to charity. The basic rate of income tax might have fallen from 22% to 20% at the start of this tax year, but a concession remains in place for charities to continue to receive tax relief at the old rates. This is a valuable concession for UK charities who originally thought they would lose over ?90 million each year as a result of the lower basic rate of income tax.
The Gift Aid system means that for every ?1 you give to a charity, they will receive ?1.28. If you are a higher rate income tax payer you can claim back the difference between the basic and higher rates of income tax as personal tax relief.
Martin says: "The Gift Aid concession only remains in place until 2011, so now is a good time to make charitable donations and ensure that your chosen charity receives the full benefit."
3 - Review your pension. The introduction of a simplified pension tax regime in April 2006 generally increased the level of tax allowable pension contributions for most people. It is now possible to contribute up to 100% of your earnings to an approved pension scheme each year, with an annual allowance of ?235,000 for the 2008/09 tax year.
It is possible to contribute up to ?3,600 each year without reference to earnings, and this would require a net contribution of ?2,880. This option is often used by parents who want to start making long-term retirement provision for their children and also for making contributions on behalf of a non-employed spouse.
Martin says: "Too many people still have older pension plans that are in overpriced contracts or poorly performing funds. Since Stakeholder pensions were introduced in April 2001 the cost of private pension plans has significantly fallen and there are often more competitive options available.
The rising popularity of Self Invested Personal Pensions (SIPPs) is evidence of increased consumer demand for cost effective and transparent pension arrangements for their retirement planning."
4 - Complete your tax return. Now that the tax year has finished, it is a great time to start collating all of the information you need to complete your Self Assessment tax return. The deadline for submitting a tax return to HM Revenue & Customs for the 2007/08 tax year is 30th September 2008, if you want them to calculate your tax bill for you.
Alternatively, if you want to work out your tax bill yourself you have until 31st January 2009 to submit your tax return for the 2007/08 tax year.
Martin says: "There is always a last minute rush of people who leave it until days before the deadline to submit their tax returns. Rather than wait, get in control of your personal finances now and submit your tax return as early as possible. It will be one less thing to worry about at the end of the summer and you can feel smug when the newspapers are reporting another computer crash at the Inland Revenue next January."
5 - Check out your life assurance. A spring clean of your personal finances is a good time to read the small print on any life assurance policies and ensure you have sufficient cover in place. Start by thinking about how much income and/or capital you would need to have in place in the event of a death or serious illness in your family, and work your way back from there.
By looking at the existing cover you have in place you can work out if there is any shortfall and obtain relevant cover to fill the gaps. At the same time you should review the cost of your existing life assurance cover to make sure you are not paying over the odds. Any cost savings you make can then go towards meeting your other financial objectives.
Martin says: "Many life assurance companies have cut their rates over the past few years so it is possible to make savings in this area. Reviewing your life assurance needs and putting in place adequate cover will ensure that you can sleep soundly at night, knowing that if the worst was to happen your family would at least remain financially secure."
6 - Get a grip on your debts. The availability of mortgages and loans remains in focus as the global 'credit crunch' continues. Debt is a drag on your ability to meet other financial objectives. It is also expensive, so the reduction of personal debts can have a big impact on your financial position.
Martin says: "One of the most effective ways to protect yourself from a potential economic downturn is to work hard on reducing your debts. It usually makes sense to start with your unsecured debts first (credit cards, store cards, personal loans, overdrafts, etc) and then think about bringing down the size of your mortgage. Paying off debt is quite often a more effective use of surplus income or capital than investing the money where the returns will be subject to tax."
7 - Organise your financial plans. Use the start of a new tax year as a great opportunity to get really organised and take control over your financial plans. At the very least this should mean filing away all of your financial paperwork into a set of folders with different sections for each policy. This makes it easier to find policy numbers and values in the future.
You should seriously consider taking this a step further and engaging with a Certified Financial PlannerCM professional who can help you create a documented personal Financial Plan. This process will help you to identify your financial goals, establish your current financial position and form an action plan for the future.
Martin says: "The fees for using a Certified Financial PlannerCM professional should easily be recouped in a short space of time through cost savings on financial policies and by having greater control over your cash flow. It will also give you the certainty of knowing where you are going with your money at a time when there is a lot of uncertainty in financial markets."
This article is for general consideration only and the information contained herein is not to be acted upon without first seeking professional independent financial advice. Informed Choice Ltd is authorised and regulated by the Financial Services Authority.
