How important is tax in financial planning?

At a glance

• Tax planning shouldn’t be considered only at the end of the tax year – it’s something that should be built into your wider financial plan.
• The first step is to talk to a financial adviser and discuss your long-term goals and aspirations.
• We can guide you in how to achieve your objectives and make the best use of tax reliefs and allowances.

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At the end of every tax year, there’s a flurry of activity as people scramble to make the most of their tax reliefs and allowances. But you shouldn’t just have your eye on 5 April when you’re thinking about tax – it should be woven through the fabric of your entire financial plan, at every stage of your life.

We call this taking a holistic view of your finances. It means looking at the big picture, both your current financial circumstances and what you want your future to look like. As well as incorporating any variables that are unique to you, your financial plan will, to some extent, take into account what’s happening in financial markets and the wider world.

What do we mean by tax planning?

Tax planning isn’t always a ‘visible’ part of wider financial planning; however, tax matters cut across most aspects of your personal finances and are therefore vital for your financial wellbeing. And how important is tax in financial planning? It’s an integral part of any plan. A financial adviser starts by getting to know you, your goals and aspirations. Then they work with you to create a plan that can help you achieve your goals by helping you to save money, making the most of tax efficiencies, investing in the future and protecting your wealth. In this way your adviser puts all the pieces of the puzzle together to form a coherent blueprint for the future.

Determining what products or tax wrappers will work best for you is really the final step, explains Tony Clark, Senior Propositions Manager at St. James's Place. “Every financial activity that you plan will have tax already included and thought about. Where a lot of people come unstuck is that they look at the products first. They think, ‘What can I do for tax? I’ll stick some money in my pension or my ISA.’

“But if you’re able to think like an adviser would, start with ‘What’s my plan?’ and then use that armoury of tax-efficient allowances and reliefs. We can build an advice picture and guide you in the best way to achieve your objectives, plugging in the products for whatever you need at the right time. That’s a holistic approach.”

Avoid the last-minute panic

The Autumn Budget revealed a raft of changes to tax rates, thresholds and allowances, and this is where a financial adviser can really prove their worth. Not only is it their job to keep on top of these changes and what they mean for you, but they’ll also look at those allowances not in isolation, but as part of your broader, tailored plan.

Taking a proactive rather than a reactive approach, they’ll look at tax as a whole collection of allowances and reliefs, rather than focusing on just one aspect. For instance, many more people are at risk of being caught in the 60% tax trap, which means those earning £100,000 to £125,140 will effectively pay 60% tax because of a tapering of the personal allowance for those earning above £100,000. Effective tax and financial planning can manage income so someone can keep as much as possible of their personal allowance, for example, through pension contributions, salary sacrifice or careful management of a bonus to reduce taxable income.

When should I think about tax planning?

Tax planning should be considered all year round, not solely in the final days or weeks leading to tax year-end. It’s understandable that you have a busy life, and it can be tough to find the time to think much about your aims for the future, much less about tax. That’s why sitting down with an adviser and talking it through is a useful exercise.

Even if your goal is something vague, such as “I want a comfortable retirement”, that can give your adviser something to work with as they plan the best use of tax reliefs and begin to build that into your pension contributions, for example. “For some people, having a plan may take a bit of a change in mindset,” says Tony, “but it does remove that sense of urgency and panic at the end of the tax year.

“Creating that adviser’s way of thinking, long term, takes the worry out of it because tax is already planned in, and you haven’t got to think about it. You don’t have to get to February or March and then rush to top up your ISAs because it’s already taken care of.”

Is tax planning necessary?

Yes, and we want to make it simple for you, with maximum impact. Contact us today to see how we can help you.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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