How to plan your finances effectively for the new tax year
The start of a new tax year is the perfect time to review your finances, and it is even more important to do this in 2023 following the changes announced in the Spring Budget.
Perhaps you would like to take advantage of the changes announced in the Spring Budget to pension allowances or make a plan for saving in a more tax-efficient manner. Or maybe there have been changes in your family that you would like to factor into your financial planning.
Regardless of your goals, there are steps that any individual or family can take to plan their finances effectively for the new tax year.
This blog post will introduce key steps for savers to consider at different stages of life, from budgeting to paying down debt, trying a three-pot savings approach, reviewing tax wrappers, and getting accountable.
Please note: some of the ideas in this blog post involve an element of investing. As is the nature with investing, your capital is at risk, and you may not receive back the same amount you put in when you choose to cash out your savings.
Build a budget
Everything starts with a budget. If you do not know what is coming in and what is going out you will not be able to decide on what you might want to cut back on or work out how much you could save. In this exercise, you may also find direct debits or standing orders that you no longer use, which might bring down your outgoings further. However, it is also important to make a budget realistic, so set yourself budgets for the things you enjoy in life too – whether that be dining out, shopping or holidays – this will help you stay on track for longer by making it feel like less work.
Pay down debt
Whether clearing small residual balances or putting in place a larger plan to repay debt over time, this should help give you peace of mind that your liabilities are under control. The first most important step is to identify what debt you have, what rate of interest you are paying (possibly for each type of debt), and when it is due. Then the key is to prioritise and pay down those with high interest rates, or the threat of higher rates or penalties if you are late. The priority should always be to pay down debt ahead of doing any investing so if you have any savings or investments, consider using these to pay down your debt if the interest rate is higher than the expected return on the existing savings.
Once you have a budget in place, you should know how much you have available to put away on a regular basis. Many people think of saving as something that those in their 20s or 30s should prioritise. However, in many cases, the ability to save expands as you get older. Mortgage payments may have reduced as you pay it down, any children may be further through education or even out on their own and therefore costing you less. Regardless of where you are in your life journey, saving and investing on a regular basis is the key to being able to live the life you want in the future. Putting a little extra away monthly can soon stack up.
Try a three-pot savings approach
One of the most effective ways to grow your savings while also managing investment risk is to take a three-pot approach. To do this, divide your savings into three pots:
- Rainy Day Savings: a savings pot of between 3-12 months expenditure to protect you should there be an emergency by giving you some cash to rely on without needing to take out any debt.
- Foreseeable Expenditures: a savings pot for expenses that you know are coming up in the future but you may not have a date for (i.e., a new car in 3-5 years’ time), which should be set aside in safer investments depending on the time frame to limit any volatility of investing in markets.
- Lifetime Savings: this pot is for the rest of your savings, which you may use to provide an income for life after work or a legacy to your children and grandchildren. We usually recommend investing these funds fully with a view to growing them ahead of inflation, provided you have the risk appetite for it.
Protect yourself and your family
Whether it is putting in place a Will or taking out life insurance, it is important to make sure that you and your loved ones are protected should the worst happen. No one likes to dwell on what might happen should they receive bad news; however, many of us do not take any action to ensure that these concerns are nullified. It is important to make sure that at least some of the risk in life is taken care of. We recommend clients address this in a few fundamental ways:
- Write a Will: make sure that in the event of your death, the assets you hold make their way to the people you want them to.
- Lasting Powers of Attorney: like a living Will, these allow another individual to take control of decisions relating to your finances or health should you be unable to.
- Financial Protection: whether this be insurance, critical illness protection, or income protection, it is important to make sure that you, or your family, are able to continue to meet your financial obligations regardless of what life might throw at you.
Check your tax wrappers
One of the most tax-efficient ways to build your savings is to take advantage of the tax relief offered by tax wrappers such as ISAs and pensions*. Any adult in the UK can currently save up to £20,000 without being required to pay tax on interest earned, and save up to £9,000 for their children’s future in the same manner by opening a Junior ISA. However, the recently announced changes to pension relief are likely to offer the best opportunity to build your long-term savings. With the threshold for the Annual Allowance increasing from £40,000 to £60,000 and the income threshold for the Lifetime Tapered Allowance increasing from £240,000 to £260,000, these changes offer savvy investors an opportunity to pay less tax while saving more towards their future – whether using a pension provided by their employer or a Self-Invested Personal Pension.
Consider appointing an Adviser to work with you to manage your savings or provide you with a financial plan, they will then take care of this for you. Alternatively, set aside time once a month, or once a quarter, to look back on your goals and see what progress you are making, whether this be paying down debt or saving for the future. It is important to keep revisiting your budget too so that you remain on track – it is far too easy to get what is known as lifestyle creep where your spending slowly climbs over time, one indulgence at a time.
How we can help with your
The steps shared in this blog post can help savers of all kinds, although we often find that our Wealth Planning Service can help our clients exceed their financial goals or meet them earlier than anticipated. Whatever your goals are for the new tax year, our Wealth Planning experts can help you to save, plan, and invest** using the most suitable and tax-efficient methods.
Effective Tax Planning is integral to our Wealth Planning process. This is also why we offer an integrated Wealth Management service across planning and investing, as we believe working with a Wealth or Financial Planner is the most effective way to make your finances go further.
For personalised advice on how to structure your finances to take advantage of the changes announced in the Spring Budget, speak to an Adviser.
* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
** As is the nature with all investing, your capital is at risk and you may not receive back the same amount you put in when you choose to cash out your savings.