3 Essential Tax Year-End Tips for Investors Under 40
By Holly Mackay, Founder & CEO
The end of the tax year is on the 5th April so time to get your skates on to make sure you’re using every trick in the book to keep tax low and spring clean your finances.
Most savers and investors under 40 are starting from a relatively low base and so tend to use the end of the tax year to make small top-ups to any tax-efficient accounts - or use it as a prod to get started! Boring Money research found that 65% of 18-24-year-old savers are considering taking out an investment product in the future, while 59% of those aged between 25-34 say the same. Agonising about choice and procrastination are common so here are some ideas to get started or to do more!
Expert Sam Secomb says that at this time of year, it's all about planning ahead - so you don't end up scrambling to use up any allowances in the final days before they run out.
I think the biggest difference between how the savvy investors manage the end of the tax year compared to others is that they actually focus on using the available tax allowances on the first day of the new tax year. Rather than the stress of scrabbling around trying to use the allowances before they expire at the end of a tax year, they’ve been invested for a year already and are just waiting for 6th April to arrive so they can go again! It can add up to a lot of extra loot in ISA and pension pots too because more of your money stays in your investment rather than gets lost to tax.
If you're a saver or investor under the age of 40, I've whittled down some top end-of-tax-year tips for you. Here are three things to consider this year:
1. Start or pay into a Stocks & Shares ISA
People under 40 who are finding their financial feet should consider setting up, or paying into, a Stocks & Shares ISA. Boring Money research shows that two thirds of investors under the age of 44 opened their first investment account in the last 5 years, meaning the short-term bumps of the initial shock of the Covid-19 pandemic were likely to have been their first market shock. Knowing who to trust with your money can be tricky, so I've picked three ISA providers I think are decent who let you get going with as little as £1. And they do all the complicated decision-making for you. Good for beginners and also those with little time to spend on this stuff.
2. Open a Lifetime ISA
Everyone under 40 can open a Lifetime ISA with at least a minimum of £1. Why do it? These accounts are designed to save for a first property OR for retirement. The pros are that you get up to £1,000 in government top-ups every year (a £1,000 top-up if you pay in £4,000 – it’s a 1:4 ratio). You have to be under 40 to open one, but those top-ups keep going until you’re 50. The cons are that you get penalties if you change your mind and withdraw the money. But keeping your options open is not a bad use of £1 – once an account is open, you can keep paying in and getting the freebie Government contributions until you hit 50. If you want an easy to manage Lifetime ISA, you can see the 5 winners of our annual Best Buy LISA award.
3. Make sure any cash savings are not lurking in a current account
Although interest rates are likely to fall this year, they are still at decent levels. If you've currently got any cash sitting in your current account – and millions of us do – stop it! Take advantage of good interest rates while you still can. Your current account almost certainly isn't the most competitive offer on the market. In fact, you can get over 4.5% today for a 1-year fixed rate cash account, and on the best easy access account. Check out the best Cash ISAs on the market now. Better than your savings languishing in a current account earning nothing.
Move excess money from your bank account. Have a look at what’s in your current account: How much do you need to keep for emergency savings (general rule is 3-6 months of essential spending)? If you’re adding to it over the year (i.e. saving more than you earn) and you have more than enough to cover any emergencies, then the rest could be redirected to top up your ISA.
If you are lucky enough to have a lot of cash, and you are a higher rate taxpayer, maybe check out ‘gilts’ on the major platforms such as Hargreaves Lansdown or AJ Bell. These fall into the category of investments known as ’ bonds’ – and are super tax-efficient ways for higher earners to keep cash-like assets.
Move excess money from your bank account. Have a look at what’s in your current account: How much is in there? How much do you need to keep for emergency savings (the general rule is 3-6 months of essential spending)? If you’re adding to it over the year (i.e. saving more than you earn) and you have more than enough to cover any emergencies, then the rest could be redirected to top up your ISA.
