I also like April because it marks the start of a new tax year; when new allowances kick in (thank you chancellor Philip Hammond) and savings and investment habits can be refreshed or revived, and when the crucial message about the need to invest for the long term can be reinforced.
Certainly, I am more of a ‘start’ than an ‘end of’ tax year kind of person – even though as a journalist I have often had to oversee special reports on individual savings accounts (Isas) in the run up to 5 April. Use it or lose it and all that.
I would much rather encourage people to invest early in the tax year – or throughout the tax year – rather than wait for close to the end of the tax year and then wave a red flag imploring readers to squirrel money away.
I would much rather encourage people to invest early in the tax yearThis new tax year will see adults start with fresh Isa allowances – a generous £20,000. Nothing different there, I hear you say. But this is probably an allowance more important than ever given the government’s decision to take a knife to the tax-free dividend allowance, reducing it from £5,000 to £2,000.
Isa to offset cuts
For some investors with portfolios outside the Isa and pensions regimes, they will be hit for the first time with tax on a slice of their dividends – ranging from 7.5 per cent, 32.5 per cent through to 38.1 per cent dependent on whether they are a basic, higher or additional rate taxpayer.
I am sure there will be a few clients out there (of course I mean yours, not mine) who will benefit as a result from a little bit of ‘bed and Isa’ – selling shares and then buying them back inside the Isa, thereby sheltering future dividends from any tax.
While the £20,000 Isa limit has not changed from last year’s allowance, the Junior Isa allowance ticks up from £4,128 to £4,260. A super – and much under-rated – way to build a fund that will help children meet the numerous financial challenges ahead of them in early adulthood. Be it the cost of going on to further education, the burden of a student loan overhanging them or accumulating a home deposit to put down on a matchbox.
For 16 and 17-year-olds, I love the fact that they can in effect double up on their Isa allowances – by boosting a £4,260 Jisa contribution with £20,000 into a cash-based Isa. I am sure there are plenty of parents out there waiting to oblige – or happy to be nudged by their ever attentive financial adviser.
On the pensions front, there is another £40,000 annual allowance to use and aslightly higher lifetime allowance to aspire to – £1,030,000 instead of £1m. Smart parents should also be looking to set up embryonic pension funds for children. After all, a £2,880 contribution will be topped up with tax relief, resulting in an overall (maximum) contribution this tax year of £3,600.
The start of this particular tax year marks a big step change for those contributing into a work pension via auto-enrolment. This is because of higher minimum contribution levels – they have just jumped from 2 per cent to 5 per cent overall with employees now picking up the lion’s share of responsibility – their contributions rise from 1 per cent to 3 per cent.
Next year, the minimum lifts to 8 per cent with the staff contribution increasing to 5 per cent.
Of course, there is a danger that employees will rebel against the increases and opt out – some for good short term financial reasons.
But I trust the low opt out rates that have so far characterised the auto-enrolment regime will continue. After all, most commentators agree that even at 8 per cent, the amounts most people are having shovelled into their pension pots will be insufficient to give them a half decent income in retirement.
For pension decency to prevail, we need minimum contributions closer to 15 per cent than 8 per cent.
Raise contribution rates
It is an issue that politicians will have to grapple with at some stage, although judging by the government’s auto-enrolment thoughts late last year, increases beyond 8 per cent will not be contemplated until the 2020s at the earliest. By then, the world might well have been turned upside down with the formation of a government led by Labour leader Jeremy Corbyn.
With annual personal savings allowances available to basic and higher rate taxpayers of £1,000 and £500 respectively, and venture capital trusts and enterprise investment schemes for those who are likely to fully use their Isa and pension allowances, we have an abundance of tools available to build meaningful long-term wealth.
So to the many good financial advisers out there, I urge you to start the new tax year with a positive attitude and gusto. Go out there and help your clients – new as well as long standing – accumulate for the future, and in the process help them build financial liberation.
You will feel great for doing it. Happy new tax year.
Jeff Prestridge is personal finance editor of the Mail on Sunday
