Getting your finances in order in 2024

As we approach the end of January, it's an opportune moment to reflect on our New Year's resolutions.

As we approach the end of January, it's an opportune moment to reflect on our New Year's resolutions. Whether they involved curbing certain habits, exploring new interests, or taking control of our finances in 2024, now is the ideal time to assess our progress. We can’t help with your exercise regime (although we can definitely point you in the right direction), but we have some ideas of where to start to navigate the world of personal finances and the changes you can make now to make a big impact for the years ahead. 

Reviewing your current plans and your financial goals 

Now is an apt time to reassess your existing protection or investment plans. Do they still align with your needs and goals? If you set up plans in the past it is important to assess if they are still fit for purpose and if they are still on course to help you achieve what they were intended to. Maybe your goals have changed and you need to consider a clear plan or direction for the future as the first step in getting to where you want to be.  

Perhaps 2023 saw a change in your family situation; if your circumstances have changed, such as welcoming a spouse or children, it's time to evaluate your finances as a cohesive unit. Initiating conversations about how you want your financial plans to function as a family, including decisions about ownership of assets, asset distribution on death or protecting dependents, is a crucial step in achieving financial order and providing peace of mind. This may involve looking updating wills, updating the potential beneficiaries of pensions and considering protection policies such as life assurance.  

You may have started or re-structured a business, maybe your business has grown faster than you had first imagined, or you are starting to think about selling in the future. Business owners must carefully manage both business and personal finances, recognising their close connection. Whether it’s extracting profits in the most efficient manner, establishing a clear succession plan (including protecting your family) or considering how the future of the business interacts with your future personal goals. Making informed decisions about growth, along with addressing tax, risk, and retirement planning, ensures a well-rounded approach to wealth management. 

Maintaining an emergency fund equivalent to three to six months of income provides crucial breathing space during challenging times. While the benefits may not be immediately apparent, an emergency fund becomes invaluable when faced with unexpected difficulties. However, too much uninvested cash, subject to inflation, may be losing value in real terms and does not have the potential for long term capital growth above inflation. Consider allocating funds purposefully for different goals to ensure they work towards your financial objectives. Re-evaluate your budget, making small adjustments if necessary, to enhance your financial position and align it with your future aspirations. Small but purposeful changes now can make a big difference to your future financial situation. 

The “T” word 

The end of January marks the deadline for self-assessment tax returns and if you haven't had to make a return this time, it’s not too early to start to think about possible future obligations. The dividend and capital gains tax (CGT) allowances halved in the current tax year, and they are set to halve again from April 2024. For those holding investments that are not in a tax efficient ‘wrapper’, dividends or capital growth may now surpass the allowance. The once generous £5,000 per year dividend allowance will soon shrink to a mere £500, and the annual CGT allowance will reduce to £3,000 from April 2024. 

But there is good news! Firstly, capital growth and dividends are good, they signify a return on your investment and likely the precise reason you are investing. Secondly, with proper planning, the associated tax burden can be reduced. 

Tax mitigation through pensions and ISAs 

There are strategies to mitigate high tax payments, but these require forward planning. Now is an ideal time to consider tax-efficient options, such as Individual Savings Accounts (ISAs) and pensions. Both ISAs and pensions are exempt from dividend and capital gains tax, making them valuable tools for tax planning. 

The "use it or lose it" nature of the ISA allowance emphasises the importance maximising this opportunity each tax year. You can pay £20,000 each year into an ISA and this will be free from tax on interest, dividends and capital gains. What’s more, you do not pay any income tax on withdrawals from an ISA - even if you are a higher rate or additional rate tax payer. 

There is further good news in terms of the amount that can be paid into a personal pension; now £60,000 per year (subject to relevant earnings), a meaningful amount that can be paid into a tax efficient vehicle each year. Like an ISA, investments within a pension are sheltered from dividend and capital gains tax. But in addition, when you pay into a personal pension you will also receive a tax uplift on the contribution; if you wanted to make a £100 contribution to your pension, this will cost you only £80, with the government automatically adding a £20 uplift. If you are a higher rate taxpayer, you may be able to claim additional tax relief through your tax return, so that £100 could effectively cost you only £60. For an additional rate tax payer, the tax savings can be even more attractive. 

Whether it's reassessing investments, budgeting, or envisioning your desired future lifestyle, there's no better time than today to start proactively managing your finances. Engage in conversations about your long-term goals and formulate plans that include strategic investment positioning, contribution considerations, and the utilisation of tax efficiencies achieved through forward planning. The path to financial well-being starts with deliberate action and a clear vision for the future which will benefit you and your loved ones in the years to come.