The end of the tax year is fast approaching! Here are our five end of tax year tips to make the most of your tax-free allowances.
1. Open an ISA📲
If you don’t already have one, or have not opened an ISA this tax year, consider opening one before the deadline. The last chance to open a new Moneybox ISA or Lifetime ISA if you’d like to contribute for the 2020-21 tax year will be midday 30th March. Our final collection (money added to a ISA or Lifetime ISA) for this tax year is midday 31st March.
ISA stands for ‘Individual Savings Account’ and is a savings or investment account that lets you save your hard-earned money, tax free. Each tax year you get an allowance of £20,000– an amount you can save or invest in that year without being taxed on the interest or gains. You can split this allowance across different ISA products, including a Stocks & Shares ISA and Lifetime ISA, but if you don’t use it, you lose it, as your allowance doesn’t roll over into the next tax year. Opening an ISA with Moneybox is quick and easy and can be done in a few minutes.
2. Don’t miss out on free money 💸
It may sound too good to be true, but one ISA actually gives you free money! If you’re saving for your first home, you can get up to £1,000 every tax year from the government by paying into a Lifetime ISA (also known as a LISA). Introduced to help first time buyers get on the property ladder sooner, a Lifetime ISA is available to those aged 18-39 and offers a government bonus of 25% on top of your tax-free savings. You can save up to £4,000 per tax year into your Lifetime ISA, giving you a potential bonus of £1,000 each year you save! If you think the Lifetime ISA is right for you, check out our market-leading Cash Lifetime ISA or our Stocks & Shares Lifetime ISA. You can also learn more in our blog post – What is a Lifetime ISA?
Remember – The last chance to open a new Moneybox ISA or Lifetime ISA if you’d like to contribute for the 2020-21 tax year will be midday 30th March. Our final collection (money added to a ISA or Lifetime ISA) for this tax year is midday 31st March.
3. A little can go a long way 💷
Whilst maxing out the £20,000 annual tax-free allowance might be out of reach for many of us, it’s important to remember that every little bit matters. Making the most of what you do have now so it counts towards this tax year’s allowance is key, as remember – there’s no allowance or bonuses roll over from each tax year, so if you don’t use it, you lose it. With every Lifetime ISA deposit you’ll receive a 25% top up, so just putting in £50 now, will give you an extra £12.50 in your account.
There are many simple ways to make a little go a long way, like starting with round ups (automatically save or invest your spare change from everyday purchases) or a small, regular deposits. This allows you to set money aside without even thinking about it! You can then increase these deposits over time, or use opportunities such as a pay rise or a bonus to boost your savings and investments. The average Moneybox user saves £500 per year from our round ups feature alone! A small change that could make a big difference to your savings.
4. Start your relationship with compounding 📈
The end of the tax year may already have you thinking about saving and investing for the year ahead – but be sure to turn those thoughts to actions! As the Chinese proverb states – the best time to plant a tree was 20 years ago, the second best time is now. The earlier you start investing, the more time your money has to benefit from the power of compounding. Compounding is the return you get on your original investment and the return you get on your return. Here’s a two year example:
Suppose you invested £5,000 and it grew by 7% each year. At the end of the first year, you’d have £5,350.
At the end of the second year, you’d have £5,725 – that’s an additional £375 return – because you made gains on your original £5,000 and gains on your return from year one. That’s a compound return.
So when you leave your returns to compound over time, your money can grow exponentially all by itself. As a longer term example – if you were to invest a £1,000 lump sum earning a 7% return aged 40, you’d have £3,870 when you’re 60. Start ten years earlier, at 30 and you’d have £7,612 – almost twice as much. Remember, these figures do not provide guarantees of future performance and do not include costs and charges.
5. Pay into your pension and get a free top up 💰
With a large government tax relief on your pension contributions available each year, not paying into your pension is like missing out on free money. If you’re a basic rate UK taxpayer you’ll be eligible for 20% tax relief on your contributions. There is a cap on it, though. If you’re paying income tax you can usually only get pension tax relief on contributions up to £40,000 (annual allowance) or the level of your earnings if they are less than £40,000.
The Moneybox Personal Pension allows you to consolidate all of your old workplace pensions, track your progress, and make contributions directly into one pot – all from your mobile phone. We can even help you track down your old pension pots, even if you don’t know the name of your old provider or policy number, through our Provider Search tool in-app. Simply tell us the name of your old employer and the years you worked there and we’ll do the rest! You could receive in instant result to help you track down your lost pots, or our Pension Detectives will get to work locating these for you. We now have one of the UK’s largest employer databases with over 21,000 employers! Check out the benefits of the Moneybox Personal Pension.
Lifetime ISA: If you need to withdraw money for any reason other than your first home (up to £450,000) or retirement, you’ll pay a government charge of 25% on any sum you withdraw. The effect of this charge is you’ll lose the government bonus plus £6.25 per £100 you contributed.
Pension: Tax treatment depends on your individual circumstances and may be subject to change in the future. Moneybox cannot accept a pension you’re currently paying into, or any old pensions that provide guaranteed benefits when you retire.