January is a common time for us to make changes for the year ahead, but many of those new year resolutions may already have been abandoned by this point. Fortunately, that doesn’t mean you’ve missed your opportunity to make valuable plans for the future.
In fact, when it comes to your finances, the beginning of the calendar year might not be the most suitable time to change your behaviours. Instead, the start of a new financial year on 6 April 2025 could be a useful opportunity to review your financial plan and start saving for the future.
Here’s why the start of a new tax year is the perfect time to plan for the future.
Starting at the beginning of a tax year allows you to make the most of tax-efficient saving opportunities
Finding ways to mitigate the tax that you pay may be a priority for you when creating your financial plan. Fortunately, there are several important tax rules you might take advantage of to help you reduce your bill when saving and investing for the future.
For instance, when you contribute to your pension, you automatically receive 20% tax relief at source. This means a £100 contribution effectively “costs” you £80. You may be able to claim another 20% or 25% through self-assessment if you’re a higher- or additional-rate taxpayer too.
You can benefit from tax relief on all contributions up to your Annual Allowance. This is the total amount you can contribute to your pensions each year without triggering an additional tax charge. In 2024/25, it stands at £60,000 or 100% of your earnings, whichever is lower. Your Annual Allowance may be lower than £60,000 if you are a high earner or have already flexibly accessed your pension.
Using as much of your Annual Allowance as possible could mean that you benefit from more tax relief, and may be able to grow your pension pot faster.
Your ISAs are also a useful tool when saving and investing as you don’t pay Capital Gains Tax (CGT), Dividend Tax, or Income Tax on interest or growth you generate on funds in an ISA. There is no tax to pay when you access the funds either.
In 2024/25, you can pay up to £20,000 across all your ISAs. Your partner has their own allowance, meaning you could tax-efficiently save or invest up to £40,000 between you. You can also contribute to a Junior ISA on behalf of a child or grandchild, with an additional allowance of £9,000 for each child.
Again, maximising these ISA allowances each year could help you build tax-efficient savings for the future.
If you wait until the tax year is almost over, it could be difficult to take full advantage of these allowances unless you have a large lump sum available. Conversely, if you plan from the very beginning of the tax year, you can incorporate the payments into your monthly budget and spread them out.
This may mean that you’re more likely to use as much of your allowances as possible.
Research shows that investing at the start of the tax year could generate more growth
As well as making it easier to spread your contributions across the year, contributing to an ISA or pension at the beginning of the tax year could mean that you see more growth on your investments. This is because your wealth is invested for an extended period, and you benefit from compounding for longer.
Figures from Vanguard show that if you invested £20,000 on 6 April 2024 – the first day of the tax year – and contributed another £20,000 at the start of each subsequent tax year for 25 years, you’d have £1,079,320. This assumes average growth of 5.5% each year.
However, if you invested the same amount on the last day of each tax year instead, your total pot would be £1,023,052 – a difference of more than £56,000.
In reality, you may not contribute the full £20,000 at the start of each tax year and might want to spread your payments out, as discussed above. Still, the figures from Vanguard demonstrate that the earlier you invest, the more growth you could see.
As such, you might want to begin contributing right from the start of the new tax year.
Regular contributions to your investments throughout the year could help to balance risk
If you wait until the end of the tax year before contributing to your pensions, investment ISAs, or another investment account, you may be more likely to make a single lump sum investment. This means that you purchase all those units at a single price point.
If you’re lucky and you invest when prices are low, you might generate significant growth if markets bounce back and continue on an upward trajectory. On the other hand, if you invest when markets are at a peak, you could experience significant losses in the future if prices fall again.
Conversely, when you make regular contributions throughout the year, you could purchase shares at different prices each month. Some months prices may be low, so you can buy more units with your regular investments. This could balance out other months when prices are higher.
This approach – known as “pound cost averaging” – could help you reduce the average price you pay for individual shares. It may also smooth out the effect of market movements on your portfolio, helping you to balance risk and potentially generate steady long-term growth.
Get in touch
If you want to prepare for the start of the new tax year, we can support you.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.