August 14th is Financial Awareness Day, and a timely reminder of how even the most successful professionals can overlook their finances. When was the last time you revisited your financial plan? And how can you make your money work as hard as you are? We explore this topic in more detail by looking at some common pitfalls and scenarios.
When you’re building a career, running a business, or juggling work and family, financial planning can easily take a backseat. But neglecting your financial plan could mean that you’re missing out on valuable opportunities. You could also find yourself in a position later in life where you are having to do a lot more to make your money work harder. Ignoring financial planning doesn’t just waste money; it wastes time in the long run.
What happens if I am paying too much tax?
A surprising number of people are overpaying taxes through inefficient structuring. The impact is that individuals or businesses effectively reduce their take-home pay or retained profits. This is not because they owe more tax, but because their financial affairs are not being managed properly in relation to tax rules. Always make sure you are claiming all available tax reliefs and any allowable expenses.
If you’re a business owner, this could be how your business is set up, e.g. sole trader versus limited company. Sole traders pay full income tax and National Insurance Contributions (NICs) on all profits, while limited companies split income between salary and dividends. As a result, a limited company structure can help to minimise National Insurance costs.
Many professionals and executives are paying too much tax because they are missing out on available pension reliefs. If you’re a higher-rate or additional-rate taxpayer, putting money into a pension can be one way to reduce your tax burden. Through your self-assessment tax return, you can claim additional tax relief on money placed into a private pension. You can claim 20% of your income if you’re paying 40% tax and 25% if you’re paying 45% tax.
When should I take advantage of investment windows?
Missing key windows for investments is a missed opportunity to make your money grow.
Maximise your pension investments by utilising tax relief thresholds. Stocks & Shares ISAs (Individual Savings Accounts) allow you to invest £20,000 tax-free each year. Before you reach the end of the financial year (6 April – 5 April), make use of the ISA limits.
Timing is everything when it comes to your investments, so a long-term strategy is always a sensible approach. Political instability and economic volatility can cause market shocks. However, a well-diversified portfolio can help cushion the impact of market fluctuations and support more consistent long-term growth. Reactive investing rarely reaps good returns.
How do I protect my wealth and assets for the long term?
When you are looking to protect your income, assets, or future goals, it’s important to consider the whole picture to avoid a high tax bill. Estate planning and the use of trusts can help you secure your wealth. Various types of trusts offer different benefits – speak to our financial planners for advice.
As well as making use of tax allowances, ISA limits and pension contributions, it’s worth noting any relevant Capital Gains Tax (CGT) exemptions. The CGT tax-free allowance is £3,000 and £1,500 for trusts, and you might be able to reduce your tax bill further by deducting losses.
If you’ve made a profit (gain) on a personal possession worth £6,000 or more, you might have to pay CGT when you come to sell this asset. This applies to property that’s not your main home and items like antiques, paintings and jewellery. However, you don’t pay CGT on cars (except if they’ve been used for business).
Certain insurance policies can help you safeguard your family and your wealth. From life assurance to critical illness and income protection, these forms of cover could provide your loved ones with a much-needed financial buffer should the worst happen.
Financial management gives you freedom
Efficient financial management isn’t just about managing money. It’s about managing the things that money gives you – freedom, security, and peace of mind. When did you last carry out a cash-flow planning exercise?
If you haven’t done one recently, then it’s worth revisiting this and creating a Lifetime Wealth Forecast. This will enable you to plan ahead and prepare for different eventualities that life may bring, allowing for rises in inflation, low investment returns and major life changes.
After all, nobody can predict the future, but what we can do is protect what we have and try to make the most from our hard-earned money.
For more information on creating your Lifetime Wealth Forecast and cash-flow plan, visit our Cash-flow Planning page.
Chartered Financial Planner, Nottingham
If you want to make your money work harder, then you need to make informed strategic decisions about your financial plan. This will enable you to optimise your wealth strategy so you can enjoy your earnings, while assuring your long-term financial security.
At Balance Wealth Planning, our Chartered Financial Planners can advise you on suitable ways to reduce tax and make your money grow. Without a clear strategy in place, you could run out of money when you retire or miss out on life experiences. Instead of worrying about the stability of your finances, why not ask us to help you live the life you want?
Need to review your financial plan? Get in touch with our financial planners.
Sources:
https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
https://frazerjames.co.uk/10-ways-to-reduce-your-tax-bill/
https://futurelinkgroup.co.uk/maximise-your-take-home-pay-as-a-contractor/
