10 tips to build wealth in the new tax year

What you’ll learn:

• How pension tax relief boosts your retirement savings
• Why having investment goals is important
• Why it’s helpful to diversify your investments.

Happy New Tax Year! It's that time when a whole raft of new tax allowances and reliefs become available and many of us wonder whether to make use of them to improve our financial health in the months ahead. Here are 10 simple steps to get your finances in better shape and help enhance your overall wealth.

Remember that we don’t offer advice, so if you’re unsure where to invest or how to manage your money, you should seek professional financial advice.

1. Reduce debts

A sensible first step is to pay these debts off before embarking upon investing. Work out what you owe and check the rate you’re paying. Tackle the debts with the highest interest rates first, as these will be the most expensive. One way to reduce credit card debts is to consider increasing your monthly repayments to clear the balance at a faster pace, or switch to a card offering 0% on balance transfers.

2. Track your spending

It may be worth monitoring your spending for a couple of months to see exactly where your money goes, and whether you can free up any spare cash to save or invest. You might find you have more than you thought to spare each month simply by trimming your spending – for example, by cutting out takeaways, or cancelling an unused television subscription. There’s a wide range of phone apps and online tools that can help you to track your spending, and budget effectively.

3. Plan goals and how to achieve them

Once you have decided you have enough money to spare to invest, why not set some goals and start saving for them. Knowing what your goals are, how much you might need and the level of risk you're happy to accept in order to get there can help you work out your investment plan and stick to it.

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection?

If you want to invest but find it too time consuming or need a bit of inspiration, you could take a look at our Ready-made Investment funds created and monitored by professionals. You just need to choose one of the five funds that you feel matches most closely your attitude to risk.

4. Use tax allowances

There are plenty of allowances to make use of this and each tax year – remember the tax year runs from 6 April to 5 April, so it’s worth being aware of what annual allowances you can potentially benefit from.

One of the most popular is the ISA allowance, which is £4,000 into a Lifetime ISA. You won’t pay income tax, dividend tax or Capital Gains Tax (CGT) on any investments you hold in an ISA.

You might not pay tax on interest and dividends anyway, as investors have a tax-free dividend allowance outside an ISA of £1,000 a year. However, if your dividend income is above this amount, investing in an ISA could give you the benefit of additional tax-free payments. There’s also the Personal Savings Allowance (PSA), which enables basic-rate taxpayers to earn up to £1,000 interest a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance, so ISAs may remain worthwhile for those who don’t qualify, or who have a large amount of savings and have used up the PSA.

And you have a CGT allowance which is 2023-24 tax year. If you invest outside an ISA, any profits made above the annual CGT allowance are subject to tax at 10% or 20% depending on your tax band. The rates are higher for profits made on the sale of a property that is not your main home, 18% for basic rate taxpayers and 28% if you are in the higher rate tax band.

Remember that tax rules can change in the future and their effects depend on your particular circumstances, which can also alter over time.

If you need to complete a self-assessment tax return, remember the deadline to file online is 31 January. Miss it and you could face a £100 penalty. Daunting as the task might seem, it can provide the perfect nudge to check your savings and investments are arranged in a tax efficient way and are on track to meet your goals.

5. Start a new habit

Making regular monthly contributions can be an effective and relatively pain-free way to build long-term wealth. Remember, however, investing should only generally be considered once short-term or unsecured debt has been repaid first. Drip-feeding money into investments gradually may be particularly beneficial if you’re nervous about the impact of economic and political uncertainty in the year ahead.

Bear in mind you may still lose money, as your investments could fall as well as rise in value. While there can be benefits to investing regularly rather than as a lump sum, you should also remember the impact fees have on your investment. If you’re only investing small amounts each month, the minimum monthly fee could make it expensive and may exceed returns.

6. Top up your pension

You could increase your potential wealth in retirement by paying more into your pension.

Provided that you take into account the pension allowances, and don’t contribute more than 100% of your income, you receive tax relief at the basic rate of 20% on contributions made to workplace and personal pensions, so for every £80 you pay in, the HM Revenue & Customs tops this up to £100.

The higher the rate of income tax you pay, the greater the tax relief on pension contributions. If you’re a higher rate or additional taxpayer, for example, you are able to claim up to an additional 20% or 25% on top of the basic rate through your self-assessment tax return¹.

However, remember that tax rules may be altered in the future, and their effect depends on your personal situation, which can also change. Bear in mind too that you can’t ordinarily draw benefits from a pension arrangement until you are aged at least 55 (rising to 57 by 2028), so this could be a long-term investment.

7. Stick it out

Building wealth doesn’t happen overnight. Ideally, you should invest for a minimum period of five years to ensure your investments have time to ride out the highs and lows of the stock market, potentially smoothing returns over the long-term.

No-one can know exactly when markets might rise or fall, but staying invested can help avoid the risk of missing any of the best days because you’ve sold at the wrong time.

8. Broaden your investments

As a general wealth-building rule, it’s a good idea to hold a spread of assets. These may include shares, bonds, property and cash so that you have a balanced, diversified portfolio.

This can help even out returns over the long-term, as different assets may perform in different ways depending on market conditions at the time. You can further diversify your portfolio by spreading your investments across several geographical areas.

9. Keep emotions in check

Letting your emotions direct your investment decisions isn’t generally considered a sensible path to boosting returns.

Whilst it’s both normal and understandable to experience some jitters as an investor, during periods of volatility it’s important to try not to panic and sell out of the market at a loss. At the same time if your investment has risen in value, you might be tempted to cash in and sell if you fear possible losses to come. The key is to think about the reasons why you chose your investments in the first place, and remind yourself of these if you’re feeling nervous.

10. Reinvest dividends

Many investors receive an income through dividends, which may be attractive given low interest rates.

However, if you don’t need this income, reinvesting dividends can potentially give a substantial boost to your overall returns. That’s because your returns will also earn returns, which is known as compounding. However, bear in mind that even if dividends are reinvested if the share price falls, your investments could be worth less than you put in. Nor are dividends guaranteed, as companies can cut or even suspend dividend payments if they go through a rough patch.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.