Conal Gregory: It’s time to spring clean your finances

The City of London skyline. Photo: Jonathan Brady/PA Wire
The City of London skyline. Photo: Jonathan Brady/PA Wire
Have your say

The start of the new tax year yesterday is an incentive to take up the tax concessions available but also a reminder to spring clean your finances.

The Individual Savings Account or ISA should be a priority. Income – both interest and dividends – as well as profit are free of both capital gains and income taxes and anyone from the age of 16 years can open one and can contribute up to £20,000 over the next 12 months.

ISAs are popular with over £61bn sheltered since its launch in 1999. However, the allowance is on annual basis and if the full sum was not used last year, it cannot be carried forward.

There are several different ISAs:

Stock market version

Cash through a bank or building society

Innovative which is peer-to-peer lending

Lifetime for under 40-year-olds to help purchase a first home or save for retirement

Help to Buy.

There is also the Junior ISA which can be taken out even for a baby and allows £4,260 to be sheltered this year.

The Lifetime ISA can be opened by 18-39 year-olds. Up to £4,000 can be invested annually until the saver reaches 50. The Government adds 25 per cent but this bonus is clawed back if there is any withdrawal unless the capital is used to buy a first home, terminal illness has been diagnosed with under one year to live or you reach 60. It is therefore a generous way to save for retirement.

The Help to Buy ISA was launched in December 2015 and £1,200 can be invested in the first month and £200 monthly thereafter up to a maximum £12,000. The Government adds one pound for each £4 saved up to £3,000.

If you do not have a lump sum available, drip-feed as much as you can afford. If opting for a stock market version, saving regularly not only reduces volatility but means the average cost is reduced.

Before investing in your ISA, look at any current holdings to see if they are performing as you planned. If using a cash version, consider a higher rate by opting for a longer term but with the Retail Prices Index at 3.6 per cent, not one on offer matches or exceeds inflation which means your money is being eroded in value.

For a stock market version, look at the spread, both geographically and by sector. “We advocate ensuring plenty of diversification via the use of collective investments alongside focussed direct equity holdings,” says Carolyn Black of investment manager Myddleton Croft in Leeds.

Consult the ‘Spot the Dog’ guide from Bestinvest, part of Tilney, not only to check that none of the open-end funds revealed as underperforming are in your portfolio but for its ‘pedigree picks’ for ideas.

As an example, the three-year return on £100 invested in Neptune Global Income achieved a mere £123 but £181 with Fundsmith Equity. The relative returns were minus 20 per cent and up 19 per cent respectively.

Consider non-equity investments which provide exposure to assets which have little correlation to UK markets and so provide a hedge against market volatility. Black tips HICL Infrastructure, which provides public services through over 100 projects and pays over five per cent.

The Innovative ISA is risky. You are lending to businesses which either cannot or will not borrow from traditional sources. If the loan fails and there are no assets, there is no protection from the Financial Services Compensation Scheme.

Maximise your pension contributions which is particularly useful for higher and additional income rate taxpayers. It means those with income of £34,501-£150,000 and above that higher level can gain a benefit of 40 or 45 per cent respectively.

Ask an independent financial adviser with pension qualifications to calculate how much can be contributed this year towards a pension, taking into account any unused annual allowances from the past three years.

Elizabeth Hastings, a chartered financial planner at Chase de Vere, says: “There can be additional benefits by investing in pensions including pushing your income below a level which protects your personal income tax allowance, which reduces for incomes over £100,000, or entitlement to child benefit, which reduces for incomes over £50,000pa.”

Many overlook starting a pension for a child but, just like a Junior ISA, even a new-born qualifies. Similarly, an adult who is not working – such as a spouse – can contribute a pension premium up to £2,880 and gain a tax bonus up to £720, making an annual total pension contribution of £3,600.

Those who have made capital gains should consider using this year’s concession of £11,300. The allowance has to be used this year or it is lost. However, as each spouse and civil partner has the same allowance, use the dual benefit by transferring assets which can be done with no tax charge.

To reduce later inheritance tax, use the £3,000 annual limit to make a gift. If this was not fully used in the last tax year, it can be given now. Do not overlook the £250 small gifts exemption where money up to this amount can be made to an unlimited number of people in each tax year.

One major change is the dividend allowance which has been reduced from £5,000 to £2,000. This is tax-free and means that those investors and business owners who pay themselves through dividends rather than salary will need to review their finances.

Although not specifically tied to a tax year, the tax-exempt savings plans offered exclusively by friendly societies can be a great additional way to invest. The HMRC rules restrict premiums to either £25 monthly or £270 annually, even though the figures do not equate, and require holdings to run at least 10 years. This is an ideal way to gift a sum to mature on reaching 18 or 21 years. Top performers include Foresters, Kingston Unity of Wakefield, OneFamily and Sheffield Mutual.

For those who like using their money as seedcorn for new companies, gain the tax benefits of an Enterprise Investment Scheme (increased from a maximum £1m to £2m) and a Venture Capital Trust (maximum £200,000). For the latter, the tax relief is only given to subscribers, not to savers who buy second-hand in the stock market.

Ensure your charitable donations are recorded. Higher rate tax relief can normally be obtained on Gift Aid with no minimum amount and on charitable Deeds of Covenant. Donations made in the new tax year but before your 2017/18 tax return has been submitted can be ‘carried back’ which means treated as if paid last year.

Finally, if considering helping someone out with your spare accommodation, the ‘Rent a Room’ allowance enables rent up to £7,500 to be sheltered from tax each year.