Five ways to make the best start to new tax year

How was the end of the last tax year for you? Was it a last-minute rush to use your individual savings account (ISA) allowance, or have you been left reeling as you didn’t get around to using your annual capital gains tax (CGT) exemption?

If your tax planning was done in something of a hurry, or you missed opportunities to make the most of the year’s allowances, there’s nothing to stop you making a few strategic tax moves now.

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Starting the process early will not only bring a sense of smug satisfaction, it could also save you a whole lot of stress and make you better off.

Get motivated with our five ways to get the new tax year off to the best start.

1) Complete your tax return

Never mind renewing your car insurance, or switching energy tariffs, completing a tax return is the one financial chore we all dread.

Although you have until 31 January to file your return and pay your tax bill, you can actually file your return has soon as the tax year has finished and there’s a lot to be said for getting the job done early.

• With time on your hands you’re less likely to rush your tax return and either make mistakes or miss opportunities to save tax, such as claiming tax relief on any charity donations you made during the year
• You’ll have more time to gather vital paperwork
• Finding out how much tax you owe early gives you the time to save or work out how you’ll pay your bill
• You reduce the risk of filing late and being hit with a penalty
• HMRC will be less busy – you’ll find it easier to get through on the phone and if you’re owed a refund, payments are likely to be faster
• Paying tax on savings interest, declaring capital gains or facing a larger than expected tax bill can give you the prompt you need to step up your tax planning
• You can enjoy Christmas and the new year without your tax return hovering on the horizon

2) Use your ISA allowance

Each year you can pay up to £20,000 into ISAs, but you don’t have to wait for so-called ISA season to make the most of your allowance. Get your money invested at the start of the tax year and it could get up to 12 months more time in the market than it would if you left it to the last minute.

Trump’s tariffs have represented a buying opportunity for many investors, but the current market volatility will make others anxious about investing large sums. However, it is possible to dilute risk by setting up monthly contributions into a stocks and shares ISA and drip-feeding your money into the markets. This way you get to take advantage of “pound cost averaging” – buying fewer shares when prices are high and more when they’re low – and getting smoother returns over time.

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Alternatively, if you’re very cautious, you can consider money market funds, lower-risk holdings that aim to deliver a slightly better return than cash, and redistribute your investments when you feel more confident.

3) Increase your pension contributions

Paying into a pension isn’t just an investment in your future financial security, it can also boost your finances now.

When you pay into your pension, you can claim tax relief that’s equivalent to your highest rate of income tax.

If you’re paying into a personal arrangement, such as a self-invested personal pension (SIPP), you’ll get 20% (basic rate) tax relief applied automatically by your provider. However, if you pay higher or additional rate tax, you can claim a further 20% or 25% back through your tax return to reduce your overall income tax bill.

So, if you pay £10,000 into your pension, it will be topped up to £12,500 automatically. Higher-rate taxpayers can then claim a further £2,500 rebate when they complete their next tax return, while additional rate taxpayers can claim £3,125.

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Paying top-ups into your pension can also be particularly helpful when your earnings reach certain tax milestones. For example, you may be able to avoid falling into the “60% tax trap”, which occurs when your earnings exceed £100,000 and your personal allowance starts to be tapered away. As income is calculated after pension contributions, you can use an additional payment to bring your income below the threshold and preserve your full £12,570 allowance.

Each year, most people can pay 100% of earnings, up to £60,000, into a pension and get tax relief on their contributions.

However, if you have any unused allowance from the previous three tax years, you may be able to pay more in by taking advantage of carry forward rules. This can be particularly helpful if you’ve received a large bonus from work or you’re self-employed and have a fluctuating income.

4) Think about capital gains tax

You can now only enjoy £3,000 of tax-free gains when you sell investments held in general investment or trading accounts. That means it’s pretty easy for even modest investors to start brewing a tax liability over time.

The easiest way to avoid paying CGT when you sell is to invest in an ISA or pension where your money can grow tax free.

However, even if you’ve got money held outside these tax wrappers, there are still steps you can take to reduce or (potentially) avoid a CGT bill.

If you have any ISA allowance remaining you can do a Bed & ISA. This allows you to sell investments from general investment accounts and immediately buy them back within your ISA, if they are on the same platform. So long as the amount you move doesn’t breach your £3,000 annual exemption, there will be no tax to pay and your money will then be sheltered from tax in the future.

If that’s not an option, you can make the most of your annual allowance by selling gains up to £3,000 each year. Although you won’t get any tax benefit if you rebuy the same investments within 30 days, you can reinvest gains in an equivalent investment if you don’t want to exit the market. Alternatively, you can use the opportunity to rebalance your portfolio if strong returns mean your intended asset allocation has shifted in favour of riskier holdings, or to add a bit of diversification.

5) Make the most of your annual IHT gifting allowances

If you’re worried about the size of the inheritance tax bill (IHT) your loved ones will pay when you die, you can reduce it by making gifts while you’re still alive. This means your family gets the full value of your wealth, without handing over 40% to HMRC.

Gifts are usually referred to as “potentially exempt transfers”, which means they only become wholly tax-free if you survive for a further seven years. However, everyone can give £3,000 away each year tax free, and it will immediately be outside your estate for IHT purposes. It’s also possible to carry forward your allowance from the previous year if it was unused.

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That means a married couple could gift as much as £12,000 this tax year, if they didn’t use last year’s allowance.

IHT is charged if the value of your estate exceeds the nil rate band, which is currently £325,000.

However, you may be able to pass on more than that tax free. If you’re leaving a family home to direct descendants, you can also take advantage of a further residential nil rate band worth £175,000. This means you can leave an estate worth £500,000 before IHT is payable. And, as transfers between spouses are tax-free on the first death, married couples (or civil partners) could pass on as much as £1 million to their loved ones between them.