Tax

Use Your Tax-Free ISA Allowance Before It's Too Late!

February 22, 2025

Don’t Miss Out! Use Your £20,000 ISA Allowance Before It’s Too Late

Nick Saving Money, Investing events, Tax 0 Comments

As the end of the tax year on 5 April 2025 approaches, so too does the deadline to utilize the annual tax-free Individual Savings Account (ISA) allowance.

The clock is ticking, and unless you take action in the next few weeks, this opportunity to maximize your tax-free savings for the 2024/25 financial year will be gone.

ISAs are a popular choice for savers and investors alike, offering a tax-efficient way to grow your wealth. With a diverse range of options available, from cash ISAs to stocks and shares ISAs and innovative finance ISAs, individuals have the flexibility to tailor their savings strategy to suit their financial goals and risk appetite.

The current ISA allowance stands at £20,000, providing a significant opportunity to shield your savings and investments from tax. This allowance represents a generous sum that, if left unused, cannot be carried forward to future years. In essence, any portion of the £20,000 allowance that remains untapped by the upcoming deadline will be lost, representing a missed opportunity for tax-free growth.

For those who have yet to fully utilize their annual ISA allowance, now is the time to take action. Whether you’re looking to bolster your rainy-day fund with a cash ISA, seeking to invest in the stock market through a stocks and shares ISA, or diversify your investment portfolio with an IFISA, there’s no shortage of options available.

Cash ISAs offer a secure and accessible way to save, providing a tax-free environment for your savings with the added benefit of easy access to your funds when needed. Meanwhile, stocks and shares ISAs open the door to potentially higher returns by investing in a wide range of assets such as equities, bonds and funds, albeit with a higher level of risk. And an Innovative Finance ISA, or IFISA for short, allows you to invest via P2P/crowdfunding platforms, further diversifying your portfolio (though again with a higher level of risk).

With an ISA you will never incur any liability for dividend tax, capital gains tax or income tax, even if your investments perform exceptionally well. Of course, there is no guarantee this will happen, but over a longer period stock market investments have typically outperformed cash savings, often by a substantial margin.

In recent years I have invested much of my own annual ISA allowance in a stocks and shares ISA with Nutmeg, a robo-manager platform that has produced good returns for me (around 18% over the last year alone). You can read my in-depth review of Nutmeg here. I have also invested some money in a property IFISA from Housemartin (previously Assetz Exchange). You can see my latest post about Housemartin here. You can also check out my February 2025 Investments Update to see how my Nutmeg and Housemartin investments (and others) have been faring recently.

Finally, for shorter-term savings, I am currently using the Trading 212 Cash ISA. The interest rate paid by Trading 212 is reducing from the current 4.9% to 4.5% from the start of March, but it’s still competitive with other cash ISA providers and has fewer strings attached..

With just a few weeks left to take advantage of this valuable tax benefit, delaying now could prove costly. By acting swiftly you can ensure that your savings and investments are positioned to grow tax-free, setting yourself up for a better financial future.

This has become all the more important with reports (such as this one) suggesting Chancellor Rachel Reeves is considering changing the rules applying to ISAs, and in particular reducing the tax-free allowance for cash ISAs to as little as £4,000.

In summary, the £20,000 annual ISA allowance for the 2024/25 tax year presents a golden opportunity to maximize your tax-free savings and investments. Time is of the essence, though. Unless you act before the impending deadline on 5th April 2025, this valuable allowance will be lost forever. If you have the money available, therefore, seize the opportunity now to help secure your financial future.

As always, if you have any comments or questions about this article, please feel free to leave them below.

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October 20, 2024

Should You Take a Tax-Free Lump Sum from Your Pension Now?

Nick Pensions & Benefits retirement, events, pensions, Tax 0 Comments

As speculation mounts ahead of Rachel Reeves’ upcoming budget, many UK retirees and those approaching retirement are wondering if now is the right time to take a tax-free lump sum from their pension. Already it appears growing numbers have been doing just that in anticipation of a possible tightening of the rules.

The rumoured changes in pension taxation could have significant implications, but should these potential shifts prompt immediate action? Let’s explore the factors you should consider.

What Is the Tax-Free Lump Sum?

In the UK, retirees can typically withdraw 25% of their pension pot as a tax-free lump sum once they reach the age of 55. This is an attractive option for many, offering access to a sizable portion of their savings without incurring tax. For some, it provides the flexibility to pay off debts, invest elsewhere, or simply enjoy a more comfortable lifestyle in retirement.

Rumoured Changes in the Budget

Rachel Reeves, the Chancellor, is reportedly considering reforms to pension tax relief, which could also extend to the tax-free lump sum. While no firm details have been announced, the possibility of reducing or capping the 25% tax-free allowance is circulating. This has led to concerns that those who wait may lose out on the full benefits they could currently access.

There’s also talk of broader reforms to pension rules, aimed at increasing revenue for public services and addressing the UK’s fiscal challenges. While these changes are still speculative, they are fuelling anxiety among pension holders who fear that future alterations could make withdrawing a tax-free lump sum less advantageous.

So Should You Act Now?

1. Certainty vs. Uncertainty

One of the main arguments for taking the lump sum now is to lock in the current 25% tax-free amount before any potential changes. Given that pension reforms often take time to be enacted and may not affect existing pension holders, acting sooner rather than later could provide peace of mind. However, if the government does decide to protect current retirees from any new rules, rushing to take the lump sum might be unnecessary.

2. Immediate Need for Funds

Another key factor is your immediate financial situation. If you have debts to clear, home improvements to make, or other significant expenses on the horizon, taking the tax-free lump sum now could offer a welcome cash injection. Conversely, if your pension pot is your primary source of retirement income, withdrawing a large sum may reduce your long-term financial security.

3. Future Investment Opportunities

Withdrawing your lump sum early could also open up other investment opportunities. If you have a clear plan for how you will use or invest the funds, you may benefit from accessing the money now. However, keep in mind that once withdrawn, the lump sum will no longer benefit from the tax advantages and potential growth offered within a pension.

Though you can of course reinvest the money in another tax-efficient vehicle, e.g. an ISA (annual limit £20,000) and/or premium bonds (maximum total £50,000).

4. Impact on Future Income

Remember that taking a lump sum now will reduce the size of your remaining pension pot, potentially lowering your future retirement income. If you rely heavily on your pension for day-to-day living, this could be a risky move. Make sure you understand how much income you’ll need later in life and whether taking the lump sum will still allow you to meet those needs.

5. Pension Lifetime Allowance

Another aspect to consider is the pension lifetime allowance (LTA), which capped the total amount you could invest across all your pensions without incurring an additional tax charge. While the LTA was abolished in the 2023 budget under Jeremy Hunt, there could be changes under Labour that might bring back a revised limit, especially if tax-relief reforms are on the table.

Seeking Professional Advice

If you’re unsure whether to take the lump sum, it’s essential to consult a financial advisor who can offer guidance based on your individual circumstances. Pension decisions are complex, and making the wrong move could have long-term financial implications.

Your advisor will be able to assess whether taking a lump sum now aligns with your retirement goals, or if it’s more prudent to wait and see what changes, if any, are introduced in future budgets.

Conclusion: Is Now the Time to Act?

The potential changes in Rachel Reeves’ budget have understandably raised concerns about pension taxation. While it’s tempting to act quickly to safeguard your tax-free lump sum, it’s important to weigh your immediate financial needs against the possible impact on your future retirement income.

Without firm details of what the budget may contain, it’s impossible to predict exactly how pension rules might change. For most, the best course of action will be to stay informed, assess your own financial situation, and seek professional advice before making any significant decisions.

After all, your pension is a key part of your long-term financial security, and decisions made in haste could have lasting consequences. Keep an eye on the upcoming budget announcements, and don’t hesitate to revisit your pension strategy once more concrete information is available.

As always, if you have any comments or questions about this post, please do leave them below. But bear in mind that I am not a qualified tax adviser and cannot give personal financial advice. All investing carries a risk of loss.

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How to reduce the impact of Rachel Reeves first budget

August 22, 2024

How to Reduce the Impact of Tax Rises in Rachel Reeves’ First Budget

Nick Pensions & Benefits, Saving Money, Investing events, property, pensions, benefits, Tax 0 Comments

Updated and expanded 13 October 2024

The first budget under new Labour Chancellor Rachel Reeves is scheduled for Wednesday 30 October 2024.

Speculation is rife about potential tax rises aimed at addressing the country’s economic challenges. But while tax increases appear inevitable, there is still time to take proactive steps to minimize their impact on your finances.

Here are some tips for how to prepare for and reduce the burden of potential tax hikes.

1. Maximize Tax-Efficient Savings and Investments

One of the most effective ways to protect yourself from higher taxes is by taking full advantage of tax-efficient savings and investment vehicles. These include:

ISA Allowances: The annual ISA (Individual Savings Account) allowance is currently £20,000. Money saved in an ISA grows tax-free, meaning you won’t pay any income tax, dividend tax or capital gains tax (CGT) on any profits made. As well as Cash ISAs, you can invest in Stocks and Shares ISAs and Innovative Finance ISAs (IFISAs).
Personal Savings Allowance (PSA): Basic rate taxpayers can earn up to £1,000 in savings interest tax-free. Higher rate taxpayers get a reduced allowance of £500.
Starting Rate for Savings: For those with a low overall income, the starting rate for savings can be especially beneficial. If your total income (excluding savings interest) is less than £17,570, you may qualify for the starting rate for savings, which can provide up to an additional £5,000 in tax-free interest. This is discussed in more detail in my recent post How to Maximize Your Tax-Free Savings Interest.
Premium Bonds: These offer a chance to win tax-free prizes each month. While the odds of a big win may be slim, any winnings are tax-free. Some other National Savings and Investments products, like certain Savings Certificates, also offer tax-free interest.
Venture Capital Schemes: For those willing to take more risk, schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer significant tax reliefs, including income tax relief and capital gains tax exemption on profits.

2. Diversify Your Investments

Diversification remains a cornerstone of sound investment strategy, especially in times of political and economic uncertainty. By spreading your investments across different asset classes – such as equities, bonds and property – you can reduce the risk of any single investment adversely affecting your portfolio. Consider international diversification as well to hedge against possible downturns in the UK economy.

3. Consider Using a ‘Bed and ISA’ Strategy

If you hold a lot of investments outside an ISA or other tax shelter, this can be a good strategy to reduce your tax liability.

Bed-and-ISA involves selling taxable stocks and shares and then repurchasing them within an ISA wrapper. This allows you to transfer investments into a tax-protected environment, where future gains and income will be sheltered from tax. Note that you cannot transfer taxable stocks and shares directly into an ISA, but Bed-and-ISA performs the same function.

On the minus side, Bed-and-ISA may incur some costs in terms of transaction fees and any difference (spread) between selling and buying prices. You may also become liable for CGT if any profits realized exceed your annual tax-free allowance. The long-term benefits can be substantial, however. This applies especially if – as seems likely – tax-free CGT allowances are reduced and the rates payable are increased. Of course, the Conservatives started doing this when they were in power.

4. Rebalance Your Portfolio Towards Tax-Efficient Assets

Different types of investments are subject to different levels of tax. It’s important to rebalance your portfolio to favour assets that could be less impacted by tax hikes.

Dividends: The tax-free dividend allowance for 2024/25 is £500, and anything above this is taxed at rates of 8.75% (basic rate taxpayers), 33.75% (higher rate), and 39.35% (additional rate). If dividend tax rises further, you may want to limit investments in dividend-paying stocks outside of tax-free wrappers like ISAs and pensions (see above).
Capital Gains: The capital gains tax (CGT) allowance has dropped to £3,000 for the 2024/25 tax year, and there are fears it could be cut further. Consider selling assets to crystallize gains while you can still use your allowance, or shift investments into tax-free vehicles like ISAs using the ‘Bed and ISA’ (or ‘Bed and Pension’) strategy discussed above..You can also offset capital gains with capital losses. If you have investments that have performed poorly, selling them to realize a loss can help offset gains elsewhere in your portfolio. Remember that CGT only applies when a profit (or loss) is actually realised.
Bonds: Government and corporate bonds are often seen as lower-risk investments and may be less vulnerable to tax increases than equity income streams. You might want to consider including more bonds in your portfolio.
Commodities: Gold and other commodities have traditionally been seen as a safe haven in times of economic upheaval. There are risks, however, and it’s important to do your own ‘due diligence’ and seek professional advice before going down this route.

5. Use Your Pension Allowance

Pensions are one of the most tax-efficient ways to save for the future. Contributions receive tax relief at your marginal income tax rate, which means for every £100 you contribute, the government effectively adds £20 for basic-rate taxpayers, £40 for higher-rate taxpayers, and £45 for additional-rate taxpayers.

Consider increasing your pension contributions to mitigate the impact of other tax rises. Just be sure to keep within the current £60,000 annual pension contribution limit. Note that for those earning over £260,000 (adjusted income), the tax-free allowance tapers. More info about this can be found on the government website.

If you’re self-employed, consider setting up or increasing contributions to a private pension or Self-Invested Personal Pension (SIPP) to take full advantage of these benefits.

6. Plan for Inheritance Tax (IHT) Rises

Inheritance tax has long been a controversial topic, and it may well increase under the new government. Currently, the IHT threshold is £325,000, with an additional £175,000 allowance if you’re passing your main home to direct descendants. Anything above this is currently taxed at 40%.

To mitigate IHT risks:

Consider making gifts: You can give away up to £3,000 per year tax-free, with additional allowances for wedding gifts and gifts from surplus income. Gifts between spouses are normally exempt from CGT or IHT, allowing you to transfer assets and take advantage of both partners’ allowances.
Set up a trust: Placing assets in a trust may help reduce IHT liabilities.
Life insurance policies: Some people take out policies specifically designed to cover future IHT bills. Always seek professional advice, however, as trusts and insurance policies can be complex.

7. Review Your Income Structure

Reeves may target income tax thresholds and reliefs, particularly for higher earners. Reviewing how your income is structured could help mitigate the impact.

Salary Sacrifice Schemes: Consider participating in salary sacrifice schemes, where you give up part of your salary in exchange for benefits like pension contributions, childcare vouchers, or cycle-to-work schemes. This will reduce your taxable income.
Dividend Income: If you run a business or own shares, taking income as dividends can be more tax-efficient than a salary, particularly if the dividend tax rates remain lower than income tax rates. Any good accountant will be able to advise you.
Spousal Income Splitting: If your spouse is in a lower tax bracket, transferring income-generating assets to them can reduce your overall tax burden. This is particularly useful for rental income or dividends from jointly held investments.

8. Prepare for Property Tax Changes

Property taxes, including stamp duty and council tax, could see reforms or increases. Here’s how to plan.

Bring Forward Property Transactions: If you’re considering buying (or selling) property, it may be wise to do so before any potential stamp duty increases are announced. Locking in current rates could save you significant costs.
Consider Downsizing: If you anticipate increased council tax rates or other property-related taxes, downsizing to a smaller home could reduce your future tax liabilities and lower your overall living costs. And, of course, doing this should release some of the equity in your property, which you can then use to help maintain your standard of living.

9. Enhance Charitable Giving

If Reeves increases income tax or reduces the thresholds for higher tax rates, charitable giving can become a more attractive option.

Gift Aid: Donations made under Gift Aid are tax-efficient, as charities can claim an additional 25% from the government. Higher-rate taxpayers can claim back the difference between the basic rate and higher rate of tax on their donations.
Donor-Advised Funds: These funds allow you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. It’s a strategic way to manage charitable giving while benefiting from tax relief.

10. Stay Informed and Seek Professional Advice

Tax planning can be complex, especially in an uncertain economic environment. Staying informed about potential changes in the budget and seeking professional financial advice can help you adapt your strategy to minimize your tax liabilities effectively.

Monitor Budget Announcements: Keep an eye on the budget and any subsequent economic statements to understand how proposed changes might affect you. Quick responses can sometimes yield significant tax savings.
Consult a Financial Adviser: A qualified financial adviser can help tailor a tax-efficient strategy to your individual circumstances, taking into account your income, assets, and long-term financial goals.

Closing Thoughts

While tax rises in Rachel Reeves’ first budget may be inevitable, UK residents have various strategies at their disposal to mitigate the impact.

By taking advantage of tax-efficient investments, restructuring income and staying informed, you can protect your wealth and ensure that any tax increases have a minimal effect on your financial well-being. As always, professional advice tailored to your specific situation is invaluable in navigating these changes effectively.

If you have any comments or questions about this post, please do leave them below. But bear in mind that I am not a qualified tax adviser and cannot provide personal financial advice. All investing carries a risk of loss.

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August 15, 2024

How to Maximize Your Tax-Free Savings Interest

Nick Saving Money benefits, Tax 0 Comments

In these challenging times, we all need to ensure our savings stretch as far as possible. So today I thought I’d set out the range of tax-free allowances you can use to help do this.

Personal Savings Allowance (PSA)

The Personal Savings Allowance (PSA) was introduced in April 2016 and allows you to earn a certain amount of interest tax-free each year. The amount of your PSA depends on your income tax band:

Basic Rate Taxpayers (20%): You can earn up to £1,000 in savings interest tax-free.
Higher Rate Taxpayers (40%): You can earn up to £500 in savings interest tax-free.
Additional Rate Taxpayers (45%): You do not receive a PSA, meaning all interest earned is taxable.

For example, if you are a basic rate taxpayer and earn £900 in interest from your savings in a tax year, this amount is within your PSA and therefore tax-free. However, if you earn £1,200 in interest, £200 of that will be subject to tax at your marginal rate.

Individual Savings Accounts (ISAs)

ISAs are another powerful tool for earning tax-free interest. There are several types of ISA, with varying annual contribution limits and benefits:

Cash ISAs: You can save up to £20,000 per year, and the interest earned is entirely tax-free.
Stocks and Shares ISAs: Also with a £20,000 annual limit, any capital gains or dividends received are tax-free.
Lifetime ISAs (LISAs): Designed for first-time homebuyers or retirement savings, you can contribute up to £4,000 annually to a LISA, with a 25% government bonus on contributions. The interest earned is tax-free.
Innovative Finance ISAs (IFISAs): These allow you to earn tax-free interest from peer-to-peer lending within the £20,000 annual limit.

You can mix and match these ISAs and you can now open as many as you like within a single tax year. But the total amount you contribute in a tax year cannot exceed the overall limit of £20,000.

Starting Rate for Savings

For those with a lower overall income, the starting rate for savings can be particularly beneficial. If your total income (excluding savings interest) is less than £17,570, you may qualify for the starting rate for savings, which can provide up to an additional £5,000 in tax-free interest.

Here’s how it works:

If your non-savings income is below £12,570 (the personal allowance for most people), you can use the full £5,000 starting rate for savings.
For every £1 your non-savings income exceeds £12,570, your starting rate for savings decreases by £1.

For example, if your non-savings income is £15,000, your PSA is reduced by £15,000 minus £12,570 = £2,430. Subtracting £2,430 from £5,000 leaves £2,570. You can therefore earn up to £2,570 in interest tax-free under the starting rate.

If you qualify for both the starting rate for savings and the PSA, you can earn up to £5,000 in interest tax-free under the starting rate, plus an additional £1,000 (or £500 for higher rate taxpayers) under the PSA. For example, if you’re a basic rate taxpayer with £12,000 in non-savings income, you could potentially earn up to £6,000 in interest tax-free (£5,000 from the starting rate and £1,000 from the PSA). Both allowances can be combined to maximize the amount of interest you can earn tax-free.

Premium Bonds and Other NS&I Products

Premium Bonds and certain other National Savings and Investments (NS&I) products offer tax-free interest or prizes.

Premium Bonds provide a chance to win tax-free prizes each month. While the odds of a big win may be slim, any winnings are tax-free. Similarly, some NS&I savings products, like certain Savings Certificates, offer tax-free interest.

Summing Up

By understanding and utilizing these tax-free allowances, you can maximize the interest you earn on your savings without paying tax. Here’s a quick recap:

Personal Savings Allowance: Up to £1,000 for basic rate taxpayers, £500 for higher rate taxpayers.
ISAs: Up to £20,000 per year across various types.
Starting Rate for Savings: Up to £5,000 if your non-savings income is below £17,570.
Premium Bonds and Some Other NS&I Products: Tax-free interest and prizes.

Be sure to review your financial situation regularly and consider using these allowances to optimize your savings strategy. By leveraging these benefits, you can grow your savings more effectively and keep more of your hard-won interest.

Finally, this post sums up the situation currently. The new government is looking to raise extra tax revenue any way it can, however, and tax-free savings allowances certainly aren’t immune. Obviously I will update this article (and/or publish a new one) if the rules are changed in future.

As always, if you have any comments or questions about this post, please do leave them below.

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July 15, 2024

Ten Tax-Free Ways to Boost Your Finances

Nick Saving Money, Investing events, matched betting, Tax 2 Comments

As you may have heard, UK citizens are currently bearing the highest tax burden since WW2.

And with the new government looking to raise more money to pay for its ambitious spending plans, there is no sign of that changing any time soon. So today I thought I’d set out some ways you may be able to boost your finances without increasing your tax liability.

As you’ll see, doing this needn’t involve complicated investment strategies or seeking ‘loopholes’ in tax legislation. There are numerous perfectly legal ways to boost your finances without worrying about the taxman. Here are ten methods to consider…

1. Maximize Your ISA Contributions

Individual Savings Accounts (ISAs) offer a fantastic way to save money tax-free. The annual ISA allowance for 2024/25 is (still) £20,000. Whether you choose a Cash ISA, a Stocks and Shares ISA, an Innovative Finance ISA (IFISA), or a combination of all three, any returns you make are entirely tax-free. This makes ISAs a straightforward and effective way to boost your savings.

2. Utilize Your Personal Savings Allowance

For basic-rate taxpayers, the first £1,000 of interest on savings is tax-free each year. Higher-rate taxpayers can earn up to £500 in interest before paying tax. This means you can keep more of the interest you earn from your savings accounts, helping your money grow more quickly.

3. Invest in Premium Bonds

Premium Bonds, offered by National Savings & Investments (NS&I), provide a unique way to save money tax-free. Instead of earning interest, your bonds enter a monthly prize draw for cash prizes. Any winnings are tax-free.

Premium bonds are guaranteed by the UK government and you can get your money back at any time. Obviously there are never any guarantees how much you will win (or if you will win at all) so it’s strongly advised that you have other savings and investments as well.

4. Try Matched Betting

Matched betting is a method used to exploit free bet promotions offered by bookmakers. When done correctly it’s risk-free and the earnings are tax-free in the UK. Matched betting involves placing bets on all possible outcomes of an event using free bets to ensure a profit regardless of the result. While it requires careful attention to detail, it can be an effective way to boost your finances. Just be aware that the longer you do it, the more difficult it may become to find suitable opportunities. But if you need a short-term, tax-free income boost, matched betting can certainly fit the bill.

I have written about matched betting on PAS on various occasions in the past. You can read my latest article ‘Can You Still Make Money From Matched Betting?’ here.

5. Claim Marriage Allowance

If you’re married or in a civil partnership and one of you earns less than the personal allowance (£12,570 in 2024/25), you could transfer £1,260 of your allowance to your partner, reducing their tax bill by up to £252 a year. This one simple step can provide a meaningful boost to your household finances.

6. Earn Up To £1,000 Tax-free

If you have a hobby or skill, consider monetizing it. The UK government allows you to earn up to £1,000 (gross) tax-free each year from trading or property income under the Trading and Property Allowance. This could include doing odd jobs, selling handmade crafts, offering tutoring services, or renting out a spare room occasionally. As long as you keep under the £1,000 annual limit, you don’t have to pay tax on this money or even tell the taxman about it.

7. Utilize Cashback and Rewards Cards

Cashback and rewards credit cards can provide a significant boost to your finances if used wisely. By earning points or cashback on everyday purchases, you can effectively reduce your outgoings. Just remember to pay off any balance in full each month to avoid interest charges. Cashback cards and apps (e.g. Jam Doughnut) are tax-free, as HMRC regard them as simply returning your own money to you.

8. Rent a Room Scheme

Under the Rent a Room Scheme, you can earn up to £7,500 per year (gross) tax-free by renting out a furnished room in your home. This is a great way to utilise extra space and generate additional income without incurring any tax liability.

9. Switch and Save

Regularly switching your utility providers, insurance, bank account and other services can save you hundreds of pounds each year. Comparison websites such as Compare the Market make it easy to find the best deals, and many offer incentives for switching. These savings are effectively tax-free boosts to your disposable income. And switching bonuses (as offered by some banks) are tax-free, as HMRC regard them as a form of cashback.

10. Sell Stuff You No Longer Need on eBay

Selling items you no longer need or use on platforms like eBay can provide a significant financial boost. The taxman allows individuals to sell personal items without paying tax on the proceeds provided it’s not done as a business. This decluttering process can turn unused possessions into tax-free cash.

Just be aware that if you buy things with the intention of reselling them, that would be seen as trading and there could be tax to pay. Also, if you sell a product for more than you originally paid for it, you could be liable for capital gains tax (CGT) if the profit made exceeds your annual CGT tax-free allowance.

Closing Thoughts

So there you are – ten ways you can boost your finances without incurring any extra tax liability. Of course, there is no guarantee that the government won’t change the law on some of these, so I will update this article if that happens. For the time being, though, I urge you to take advantage of as many of these opportunities as you can. In the current cost of living crisis, we all need to hang on to as much of our hard-earned money as possible!

As always, if you have any comments or questions about this article – or other tax-free opportunities that you think should have been covered as well – please do leave them below.

Disclaimer: I am not a qualified financial adviser and nothing in this blog post should be construed as personal financial advice. Everyone should do their own ‘due diligence’ before investing and seek professional advice if in any doubt how best to proceed. All investing carries a risk of loss. Note also that posts on PAS may include affiliate links. If you click through and perform a qualifying transaction, I may receive a commission for introducing you. This will not affect the product or service you receive or the terms you are offered, but it does help support me in publishing PAS and paying my bills. Thank you!

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July 5, 2024

How to Protect Your Savings and Investments Under a Labour Government

Nick Saving Money, Investing Tax, families, events 0 Comments

For better or worse, the UK has elected a Labour government. There will undoubtedly be many changes in economic policy, taxation and regulation, which of course will affect personal finances. So today I am setting out some ways in which you may be able to safeguard your savings and investments as Labour take control.

As Pounds and Sense is aimed especially at older readers, I am obviously writing from that perspective, but many of these points will apply equally to younger people as well.

1. Diversify Your Investments

Diversification remains a cornerstone of sound investment strategy, especially in times of political uncertainty. By spreading your investments across different asset classes – such as equities, bonds and property – you can reduce the risk of any single investment adversely affecting your portfolio. Consider international diversification to hedge against domestic political risks. This means investing in global markets to mitigate potential local economic disruptions. Historically, gold and commodities can also act as a hedge against economic upheavals.

2. Understand Tax Implications

Labour governments typically lean towards higher taxes on wealth and income to fund public services. Stay informed about potential changes in tax policies, such as higher rates of capital gains tax, dividend tax or inheritance tax. To mitigate the impact:

Utilize ISAs and Pensions – make full use of tax-efficient accounts like Individual Savings Accounts (ISAs) and pensions, which can shield your investments from tax.
Consider Timing of Asset Sales – if changes in capital gains tax (CGT) are anticipated, you might want to accelerate the sale of certain assets before new rates take effect.
Inheritance Planning – review your estate plans and consider trusts or gifts to mitigate higher inheritance taxes.

3. Consider a Bed-and-ISA Strategy

If you hold a lot of investments outside an ISA or other tax shelter, this can be a good strategy to reduce your tax liability.

On the minus side, Bed-and-ISA may incur some costs in terms of transaction fees and any difference (spread) between selling and buying prices. You may also become liable for CGT if any profits realized exceed your annual tax-free allowance. The long-term benefits can be substantial, however. This applies especially if – as seems likely under Labour – tax-free CGT allowances are reduced and the rates payable are increased. Of course, the Conservatives have started doing this already.

Some Online Platforms Will Undertake Bed-and-ISA on Your Behalf – that means you don’t have to do the share selling and buying yourself. One such platform is AJ Bell. This can obviously save you a bit of time and may work out cheaper as well. Be aware that you will still have to pay some fees and charges, however, along with CGT on any capital gains above your personal allowance.
A Similar Option is Bed-and-SIPP – with this you sell taxable stocks and shares and then buy the same ones back within your private pension (SIPP).
This Strategy is Named After an Older One Called Bed-and-Breakfasting – at one time this was deployed to minimize CGT liability. The law was changed to make bed-and-breakfasting less effective, but Bed-and-ISA can still work well.
Bed-and-ISA Can Also Be Used to Crystallize a Loss – this can then be set against other taxable profits in the year concerned to reduce your CGT liability.
You Can Read More About Bed-and-ISA (and bed-and-breakfasting) in this excellent article by my friends at Nutmeg.

4. Review Your Property Investments

Property has long been a favoured investment in the UK. However, the Labour government may introduce policies adversely affecting buy-to-let investors, such as rent controls or higher taxes on second properties. To protect your property investments:

Assess Rental Yields and Potential Regulations – ensure your rental income can withstand potential regulatory changes.
Consider Property Ownership Structures – holding property through a limited company can sometimes be more tax-efficient.
Stay Liquid – keep some liquidity to manage any unforeseen expenses or changes in regulation.

5. Focus on Stable Income Investments

Investments that provide steady income can be particularly valuable during uncertain times. Consider:

Dividend-Paying Stocks – companies with a history of stable dividends can provide a reliable income stream.
Bonds and Fixed Income – government and high-quality corporate bonds can offer stability and predictability.
Infrastructure Funds – these often provide regular income and are less sensitive to economic cycles.

6. Monitor Inflation and Interest Rates

Economic policies under Labour may lead to changes in inflation and interest rates. Historically, increased government spending can drive inflation, which in turn erodes the value of savings. And if inflation rises, the Bank of England is very likely to respond by raising interest rates. To combat this:

Consider Inflation-Linked Investments – investments that adjust with inflation, such as inflation-linked bonds.
Review Savings Accounts – ensure your savings accounts offer competitive interest rates. A cash ISA will also shelter your savings from tax.
Consider Fixed-Rate Mortgage Deals – if interest rates rise under Labour, a fixed-rate deal on your mortgage will offer some protection.
Take Action on Equity Release – if you’ve been considering this, there is a case for proceeding sooner rather than later, in case long-term interest rates rise

7. Stay Informed and Flexible

The political landscape can change rapidly. Regularly review your investment portfolio and financial plans to ensure they align with current and anticipated economic policies. Consider consulting with a financial advisor who can provide tailored advice based on the latest developments. Depending on your circumstances, you may want to consult with an accountant as well.

8. Invest in Knowledge and Skills

An often-overlooked investment is in your own knowledge and skills. By staying informed about personal finance and economic policies, you can make better decisions. Attend financial planning seminars, read reputable financial news, and consider taking financial education courses. There are also some excellent personal finance websites, including Money Saving Expert, Which? Money and This Is Money. I recommend reading and following all of them.

And naturally you should keep reading Pounds and Sense as well. Why not take a moment to subscribe in the right-hand column so as never to miss any of my posts in future? ➡➡➡

Closing Thoughts

While the Labour government may introduce changes that impact savings and investments, proactive planning and informed decision-making can help protect your financial future.

By diversifying your portfolio, making good use of tax-efficient investments such as ISAs and pensions, focusing on stable income investments, and staying adaptable, you can navigate the uncertainties and safeguard your assets. Remember, the best defence is a well-thought-out strategy and staying informed about the changing economic landscape. Good luck, and I wish you every success in achieving your financial goals.

As always, if you have any comments or questions about this post, please do leave them below.

Disclaimer: I am not a qualified financial adviser and nothing in this post should be construed as personal financial advice. You should always do your own ‘due diligence’ before investing, and seek professional advice if in any doubt how best to proceed. All investing carries a risk of loss.

This is an updated version of my original article.

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April 7, 2024

Why Now Could Be the Ideal Time to Take Advantage of Your New Tax-Free ISA Allowance

Nick Investing events, Tax 0 Comments

As from 6 April 2024, UK investors have a fresh chance to supercharge their savings and investments with a new £20,000 Individual Savings Account (ISA) allowance.

ISAs represent a golden opportunity for investors to make their money work harder while shielding their returns from the taxman. With tax-free thresholds for dividend tax and capital gains tax being slashed by Chancellor Jeremy Hunt, it’s more important than ever to protect your hard-earned savings and investments within an ISA wrapper.

To maximize the benefits of the new 2024/25 allowance, there’s a strong case for acting swiftly and using at least part of your £20,000 ISA allowance sooner rather than later. This is due to the power of compounding. By investing early, you give your money more time to grow, benefiting from the potential snowball effect of returns generating further returns. So the sooner you invest that £20,000 (assuming you are fortunate enough to have it) the more opportunity it has to multiply over time.

But the good news doesn’t end there. In addition to the ISA allowance remaining at a relatively generous £20,000, the rules surrounding ISAs have undergone a welcome relaxation from this tax year onward. One of the most significant changes is the ability to open more than one ISA of the same type (e.g. a stocks and shares ISA) with different providers in the same tax year. This means investors are no longer limited to a single provider for each type of ISA, giving them greater flexibility and choice in managing their investments.

Previously, investors were restricted to opening one cash ISA, one stocks and shares ISA and one innovative finance ISA (IFISA) per tax year. This restriction could prove frustrating for those seeking to diversify their investments or take advantage of new opportunities as the tax year progressed. Now, with the freedom to open multiple ISAs of the same type, investors can shop around for the best rates, terms, and investment options without being limited to a single provider for each ISA type. They can also move some or all of their money from one provider to another without jeopardising its tax-free status.

It’s important to note, however, that while the rules have been relaxed, the overall annual ISA allowance remains fixed at £20,000. This means that any contributions made across multiple ISAs of any type will count towards your total allowance for the tax year. You should still therefore take care not to exceed the annual limit to avoid any potential tax charges.

Cash ISAs offer a secure and accessible way to save, providing a tax-free environment for your savings with the added benefit of easy access to your funds when needed. Meanwhile, stocks and shares ISAs open the door to potential higher returns by investing in a wide range of assets such as equities, bonds, and funds, albeit with a higher level of risk. With a stocks and shares ISA you will never incur any liability for dividend tax, capital gains tax or income tax, even if your investments perform exceptionally well. Of course, there is no guarantee this will happen, but over a longer period stock market investments have typically outperformed cash savings, often by a substantial margin. IFISAs (e.g. from Assetz Exchange) allow you to invest is property crowdfunding and other forms of peer-to-peer finance. They are more specialized, but may appeal to some investors looking to further diversify their portfolios.

In recent years I have invested much of my own annual ISA allowance in a stocks and shares ISA with Nutmeg, a robo-manager platform that has produced good returns for me. You can read my in-depth review of Nutmeg here if you wish.

Closing Thoughts

In light of the new 2024/25 ISA allowance and relaxation of the rules surrounding them, now is the perfect time for UK investors to review their savings and investment strategies. Whether you’re looking to kickstart a new ISA or maximize your contributions to existing accounts, taking action early can set you on the path to optimizing your returns from this important tax-saving opportunity. By investing sooner rather than later and taking advantage of the increased flexibility in ISA provider options, savers can make the most of their money while minimizing their tax liabilities. So seize this opportunity to build your wealth and protect it from the taxman today!

As always, if you have any comments or questions about this post, please do leave them below.

Disclaimer: I am not a qualified financial adviser and nothing in this blog post should be construed as personal financial advice. Everyone should do their own ‘due diligence’ before investing and seek professional advice if in any doubt how best to proceed. All investing carries a risk of loss.

Cartoon image by courtesy of Bing AI.

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January 7, 2024

HMRC Crackdown on Side Hustles – Truth and Fiction

Nick Making Money events, Tax 2 Comments

As you may have heard, from January 1, 2025, digital platforms like eBay, Etsy and Airbnb will be required to collect additional information from sellers, including number of sales and amount of income generated.

This data will be automatically shared with HM Revenue & Customs (HMRC) by January 31, 2025, covering the 2024 calendar year. HMRC will then compare this against their records to see if any tax may be due.

This news has caused some consternation on messageboards and social media, with many who have ‘side hustles’ to help pay the bills worried they may be hit by an unexpected tax demand. Some of this concern may be justified, but (thankfully) much of it isn’t.

So today I thought I’d explain what’s actually happening and how you can minimize your tax liability from side hustles and reduce the risk of unwanted attention from the taxman (while staying within the law, of course).

So What’s Happening?

Digital platforms will automatically share seller information with HMRC if a seller has made 30 or more sales a year or earned over €2,000 (approximately £1,700).

The reporting threshold is set in Euro as this is a multi-national initiative by the Organisation for Economic Co-operation and Development (OECD) which aims to tackle tax evasion globally. The new rules apply to various digital platforms, defined as any app, website or software connecting sellers to consumers of goods and services.

It’s important to understand that this is a reporting change and not a change in tax law. If you didn’t have to declare certain earnings or pay tax on them before, that remains the case now. In particular, if you are selling personal possessions you no longer want/need – as opposed to items you bought with a view to selling them for profit – that wouldn’t normally count as trading and no tax would be due.

The other important exemption is that everyone in the UK has an annual trading allowance of £1,000. This means you are allowed to make up to £1,000 (gross) per year from self-employed work including side hustles. If your total annual income by this means is below £1,000, there is no need to declare it to HMRC or pay tax on it (even if you have a separate day job). Note, however, that in the case of online auction trading, that £1,000 is income before any platform fees and other selling costs are deducted.

If your taxable earnings from a side hustle are over £1,000 a year, you will need to notify HMRC via a self-assessment tax return. You will then be required to pay income tax on this, unless your total taxable earnings from all sources are below the personal tax-free allowance (currently £12,570).

Top Tips

As promised, here are some tips to help you negotiate the rules surrounding side hustles, minimize any potential tax liability, and reduce the chances of attracting unwanted attention from HMRC, all while staying within the law.

Keep careful records of all your business activities. That includes activities that you don’t believe count as trading, e.g. selling your unwanted possessions. You may need this info if you are challenged by HMRC.
In particular, keep a running record of total sales and number of transactions on platforms such as eBay. If you’re having a clear-out, it won’t be hard to exceed the 30-item or €2,000 limit that will trigger a report to HMRC. As mentioned above, if you’re just selling your old stuff, there shouldn’t be any tax liability. But you might understandably prefer to avoid having to field queries from HMRC about your selling activities.
It might therefore be a good idea to use a variety of platforms for selling your stuff rather than just one. So instead of just eBay, use other similar sites such as Facebook Marketplace, Gumtree, Vinted, Craigslist, Ziffit, eBid, and so on. Aim to keep your total sales on any one platform to under 30 and under €2,000 in total.
If you are selling items you have made yourself (e.g. clothing or jewellery) on websites like Etsy, be aware that this will also usually count as trading and any profits may be taxable. Again you can claim the £1,000 trading allowance, though.
If you think what you are doing counts as trading, monitor when your gross annual income (or turnover if you prefer) is approaching £1,000. At this point you might prefer to ‘shut up shop’ until the following year. Otherwise you will need to declare your earnings to the taxman and (if required) pay tax on them.
Be aware that cashback earned through websites such as Quidco and Top Cashback is not taxable. Neither is the cashback paid with certain bank accounts.
Note also that lottery and competition prizes are not generally taxable in the UK. Neither are gambling wins (not that I recommend this) or any profits made through matched betting.

I hope this article will have clarified the situation for you if you’re pursuing a side hustle or considering doing so. As I said earlier, the tax rules haven’t changed, but with the new reporting regime it’s more important than ever to understand what the tax and trading rules are and ensure you stay within them.

If you have any comments or queries, as always, feel free to leave them below. Please note that I am not a tax professional, however, and cannot answer detailed questions about your personal financial circumstances. As I said in this blog post a while ago, if you need advice with tax matters, in my view a qualified accountant should always be your first port of call.

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November 23, 2023

Important Change to ISA Rules in the 2023 Autumn Statement

Nick Investing events, benefits, Tax 4 Comments

As you will doubtless know, yesterday the Chancellor delivered his 2023 Autumn Statement. This included various economic measures, which you can read about on the Moneysaving Expert website (among other places).

I thought today I would highlight one particular change to the rules about tax-free ISAs (Individual Savings Accounts) which caught my eye. From April 2024, you will be allowed to open more than one of any particular type of ISA in a single tax year. This is a change I was particularly pleased to see, and have in fact been advocating on Pounds and Sense for some time.

As you may know, there are various types of ISA, including the stocks and shares ISA, cash ISA and IFISA. The latter stands for Innovative Finance ISA and allows people to save tax-free with peer-to-peer lending and similar platforms. Everyone has an annual tax-free ISA allowance, which currently stands at £20,000. Despite rumours to the contrary, this limit was not changed in the Autumn Statement.

So why do I think the change in the rules announced yesterday is so important? Well, for one thing, it brings about much greater flexibility in ISA transfers. Investors will now be able to transfer funds freely between different types of ISA without jeopardizing their tax-free status. They will also be able to transfer just part of a holding to a different provider, regardless of when they paid in the money.

This will empower investors to optimize their investment strategy by making it easy to move money between cash, stocks and shares, and Innovative Finance ISAs. This enhanced transfer flexibility should enable investors to adapt to changing market conditions, seize new opportunities, and align their portfolios with their evolving financial goals.

A further benefit of the rule change is that it will make it easier for investors to build a well-diversified portfolio. Rather than having to put all their money into just one stocks and shares ISA per year (for example) they can divide it among a range of providers. Regular readers will know that I am a big fan of diversifying your portfolio as much as possible to help manage risk, and this rule change certainly facilitates that.

The change will also make it easier for investors to try out new platforms with relatively small investments initially. Previously they may have been deterred from doing this by the realization that once they had committed to one particular provider, they would have to stick with that provider for the rest of the financial year. FOMO (fear of missing out) may even have inhibited some people from investing at all.

This is certainly something I’ve experienced myself. At the start of a new financial year, I was wary of investing in any type of ISA, because I knew that once I did so, I would then have to stick with that provider for that type of ISA for the rest of the financial year.

So those are just some reasons I particularly welcome this rule change. From a broader perspective, I think it will also encourage more people to start investing, which has to be good for UK PLC in general. Apart from a few admin costs, it seems to me this measure will cost the government nothing, while bringing major benefits to the economy and individual investors. Really, the only thing I don’t understand is why it wasn’t done sooner!

So those are my thoughts anyway. But what do you think? Will the new rule encourage you to make more use of ISAs in future? I’d be interested to hear any views.

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March 30, 2023

Two Places You Really Shouldn’t Turn for Tax Advice (and One You Definitely Should)

Nick Saving Money, Everything Else Tax 0 Comments

Today I thought I’d set out my views on where best to seek advice on tax-related matters. From feedback received I know that this is a topic that concerns a lot of people, especially the growing number who are turning to ‘side hustles’ to help make ends meet.

I’ve been self-employed for around 30 years now and have quite strong opinions on this subject, especially as I see a lot of dodgy advice about tax being bandied about. So let me start by setting out the two places that in my view you shouldn’t generally turn for tax advice (and you definitely shouldn’t rely on).

1. Social Media

I am thinking especially here about Facebook groups and online forums (or messageboards). These are popular places for people with a shared interest to ask (and answer) questions about subjects that concern them.

I belong to various groups and forums aimed at UK writers and bloggers, and get a lot of useful information and support from them. However, I regularly see people asking questions on them about tax matters, and I’m not at all convinced that this is useful or sensible.

What typically happens in these cases is that other members weigh in with their advice and opinions. Although these are offered with the best of intentions, they are often contradictory and sometimes downright wrong. I imagine that in many cases the original questioner ends up more confused than when they started. Or – perhaps worse – they proceed on the basis of dubious advice which could result in them facing fines and penalties or, conversely, paying more tax than they need to.

Most people in these groups are not trained accountants, but that doesn’t stop some of them airily dishing out tax advice anyway. Replies beginning with phrases such as ‘I’ve always understood’ or ‘I’m pretty sure that’ or ‘As far as I know’ or ‘I could be wrong, but’ should always be regarded with considerable scepticism.

Groups also often have ‘gurus’ who claim (and may or may not have) a deeper knowledge of these matters. Their pronouncements may be treated as akin to holy writ by other members. Again, be cautious about blindly following advice from these individuals, even if they apparently have qualifications and/or professional experience. I have seen advice from such people that is definitely wrong or at least highly questionable, but nobody in the group dares challenge them about it. This happens in other fields as well as tax, incidentally.

I would also extend my caution about getting advice from social media to blogs (yes, including mine). I have seen some good advice on blogs, but also plenty I would regard as debatable to say the least. Definitely don’t take anything you read about tax on a blog as gospel, even if the person in question does have thousands of followers!

2. HMRC

Yes, you read that correctly. In my view, HMRC should seldom be your first port of call for tax advice.

There are various reasons for this. One is that, when you phone HMRC, the person you will generally speak to is a call handler. They will (or should) obviously have a reasonable working knowledge of how the tax system works, but they are definitely not expert in every aspect. If you ask them complex questions about (say) what expenses you can and can’t claim against income or what counts as a capital gain as opposed to taxable income, you are likely to get different and contradictory advice according to whom you speak to. Or they may simply tell you that advising you about this is outside their remit.

In addition, it’s important to bear in mind that HMRC are not in business for your benefit. Their job is to maximize tax revenues for the government. They can’t and won’t advise you on how to legally organise your affairs in such a way as to minimize your tax liabilities (which every taxpayer is perfectly entitled to do).

That being said, there are certain occasions when you can and should contact HMRC. This is when you have specific questions about your taxes, e.g. whether a certain tax payment has been received, what is your tax code, when is your next tax payment due, and so on. The call handlers should have this information easily accessible on their computers and will be happy to pass it on to you.

So Where Should You Turn for Tax Advice?

You may have guessed already, but if not I won’t keep you in suspense. The answer is a professional accountant.

Accountants are trained and experienced in all aspects of the tax system. They have both theoretical and practical knowledge of how the system works and how the (complex) rules are typically interpreted by HMRC. And they have to keep themselves up to date with the endless legal and procedural changes.

Also, unlike HMRC, an accountant is four-square on your side. They will advise you on the best way to organize your affairs to minimize your tax liability. They will answer any questions you may have, e.g. what records you need to keep. When the time comes, they will (if you want them to) compile your accounts and submit the relevant figures to HMRC in your tax return. And if any queries or problems arise, they will act on your behalf to try to resolve them.

A further benefit of having your accounts prepared by an accountant is that HMRC will know that a finance professional – someone who speaks their language – has compiled them. Other things being equal, this is likely to mean they will be more inclined to accept the figures and not dispute them.

Even if you prefer to prepare your own accounts (perhaps using accounting software online), having an accountant check your work (and maybe submit it on your behalf) can be a shrewd policy and reduce the risk of HMRC querying your tax return.

Even if you aren’t running any sort of business, there may still be a case for getting an accountant to help with your taxes. Many older people, for example, have multiple streams of income, from stocks and shares to ISA accounts, property rentals to pensions. Some of this income may be taxable and some not, and varying tax rates and tax-free allowances may apply. Most accountants are more than happy to provide a service to people in this situation as well.

There is, of course, one drawback to engaging an accountant, and that is the cost. This will probably amount to a few hundred pounds a year (maybe more in some cases). Not to pay this, however, is in my view a false economy. A good accountant is likely to save you at least as much in unnecessary tax as they cost you. And the reassurance (and relief) of having a finance professional available at the end of a phone when any queries with taxation arise is impossible to put a price on (but extremely valuable).

After thirty years of self-employment (and being semi-retired now), I still wouldn’t dream of not having an accountant. And since I’m mentioning this, a shout-out here for my own accountant, Rob Ollerenshaw, who has looked after my tax affairs for over twenty years. I recommend him without reservation to anyone in the North Birmingham/South Staffordshire area, or indeed further afield (he tells me he has clients as far away as Cornwall!).

So those are my thoughts about where best to get tax advice, but what do YOU think? Please post any comments or questions below as usual.

This is a revised and updated version of my original post.

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