4 tips to kickstart the new tax year right

The start of a new tax year is a perfect opportunity to pause, reflect on your long-term investing goals and spring clean your finances.

What’s different this year though, is that the start of the new tax year is feeling slightly bittersweet. Soaring energy prices and a rise in inflation will be front of mind for lots of households.

Not only are we dealing with a cost-of-living crisis. We’ve also had to witness some severe ups and downs in stock markets during the pandemic, and more recently as a result of the war in Ukraine.

It might feel like a difficult time to think about our finances, and lots of us are probably a bit nervous around where our money is best placed.

Although there are no guarantees when investing, the more you can put away for longer, the better it could be. That’s why we’ve looked at four tips for you to kick start the new tax year in the right direction.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please seek advice. Unlike the security offered by cash, the value of your investments will rise and fall, so you could get back less than you put in. Tax rules can change and any benefits will depend on your circumstances.

Get to grips with your allowances

With different tax hikes in tow, it’s essential to know how you can shelter as much of your hard-earned cash as possible. So, start by getting to grips with your different tax sheltering allowances.

The ISA allowance this tax year is £20,000, meaning you can save up to £20,000 in a Cash ISA or Stocks and Shares ISA, or both for example. The Junior ISA (JISA) allowance is £9,000.

ISAs let you shelter your money from UK income tax and capital gains tax. If your investments go up in value, you get to keep 100% of the profits when you sell them. And if your ISA investments make an income, it’s all yours to keep as well. That’s good news if you could be impacted by the dividend tax hike. Withdrawals are tax free too.

The same’s true for a Lifetime ISA (LISA). If you’re saving to buy a first home or later life and are between 18-39, you’ll get a 25% government bonus on contributions up to £4,000 each tax year. This means you could earn an extra £1,000 every tax year.

It’s important to know that if your employer offers a workplace pension, and you qualify for it, that should typically be your first port of call for retirement savings. Especially if they offer salary sacrifice. But once your employer is making contributions into your pension at their maximum level, then a Lifetime ISA could be a more tax-efficient choice for any other retirement savings. If you save into a Lifetime ISA (LISA) instead of a pension, your entitlement to certain means-tested state benefits could be affected.

You can withdraw your money to buy your first home after 12 months or wait until you’re 60 and take your money out then. Other withdrawals will usually mean there’s a 25% withdrawal charge so you could get back less than you put in.

How early should you use your ISA allowance?

Pensions are another tax-efficient way to save for retirement. You have the potential to lower your tax liability by sheltering long-term investments from income tax and capital gains tax.

You can normally get a top up from the government in the form of tax relief on contributions into your pension. You’ll get tax relief on personal pension contributions up to 100% of your UK earnings, or £3,600 if this is greater (if you’re a low or non-earner). And the first 25% taken out from a pension from age 55 (rising to 57 in 2028) is usually tax free.

8 ways we’ll pay more tax from April and how to reduce your tax bill

Start as early as you can

Short-term news or market ups and downs can be unnerving.

The way our emotions change during the highs and the lows is why lots of us decide to invest when markets are doing well and sell when markets are falling.

In reality, which way the market moves today, tomorrow, or next week doesn’t really matter over the long term. What matters is you stay invested and diversify your investments across areas you think will do well over the next five to ten years and beyond.

Investing in uncertain times

Let’s say you’d invested your full £20,000 ISA allowance in the UK stock market at the start of the tax year in 2010. You would be nearly 10% wealthier by the end of 2021 compared to someone who invested at the end, before any charges. That’s without making any other contributions in the years afterwards and doesn’t account for inflation.

When it comes to investing, time’s on your side when you’re trying to build your wealth. So, start as early as you can.

Are you waiting for the right time to invest?

Set or review your investment goals

Regardless of one tax year to the next, you should be thinking long term when you invest, so your investment goals shouldn’t look too different. But the start of the tax year is a perfect opportunity to review and rebalance your portfolio to make sure it still aligns with your investing goals.

• Does the level of risk you're taking match what you’re really comfortable with?
• Have your investment goals or your personal circumstances changed?

If not, the framework of your portfolio might not need to change very much. If they have, you might need to make some tweaks.

If you’ve just topped up ready for the start of the tax year, you could think about rebalancing your portfolio.

Rebalancing is about restoring the original weightings of the investments in your portfolio. It helps make sure you’re matching the level of diversity and risk you planned on when you started out.

You can rebalance by topping up or re-directing any regular saving instructions to areas which have become underweight and not done as well.

Another way is to sell a portion from your investments that have done well, to top up investments that have performed poorly. It might sound counterproductive, but top performers usually come in waves and it will help bring the portfolio back into kilter.

More on reviewing your portfolio

Check in on your overall financial health

Having a healthy investment portfolio is only part of your overall financial wellbeing.

It’s important to make sure you check your overall financial health too. So, while starting afresh for the start of the new tax year, start by checking your other pillars of financial resilience too.

Even though we can't always control what happens in life, we can prepare ahead to improve our financial security over the long term.

See the 5 key building blocks for financial resilience