6 April marked the start of a new tax year, holding a host of changes and developments affecting personal finances.

New calculations by interactive investor, part of abrdn and the UK’s second-largest direct-to-consumer investment platform, show that the average Briton faces an additional £411 in costs in April, rising to £4,569 over the rest of the tax year.

This takes into account mortgage costs, energy costs, income tax and National Insurance rises, as well as council tax. Meanwhile, renters face an additional £141 in costs this month, rising to £1,327 over the tax year.

Myron Jobson, Senior Personal Finance Analyst at interactive investor, says: “As keeping on top of rising prices remains a daily battle for many, the new tax year personal finance considerations can easily be missed. But being in the know of the changes afoot and taking full advantage of all the tax breaks and support available, so that you don’t pay more than you need to, could help bolster your financial resilience for the short and longer term.

While inflation is forecast to cool significantly in the second half of the year, the surprise increase in inflation in February is a painful reminder that the economic script isn’t always followed. As such, hoping for the best and preparing for the worst remains a diligent approach to finances.”

Middle earners set to pay £398 more in tax because of fiscal drag

Myron Jobson says: “The big freeze in the income tax personal allowance (£12,570) and the point at which people start paying higher tax rates until 2028 means that millions of taxpayers are likely to be pushed into higher tax bands as inflation affects their wages and income. Known as ‘fiscal drag’, this is the ultimate stealth tax, which feels particularly tough at a time when so many people are struggling to keep up with rising prices.

“Our calculations show that someone earning £30,000 is set to pay £398 more in tax this tax year because of fiscal drag than if the personal allowance (£12,750) had been indexed in line with Office for Budget Responsibility forecast inflation for the tax year ended April 2023 (9.9%).

“The freezing of income tax thresholds and other personal allowances has bolstered the allure of paying into a workplace pension through salary sacrifice. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions. Basic-rate taxpayers get 20% pension tax relief, turning an £80 contribution into £100. If you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief .

“Think of a pension as deferred income and this seems like a good way to reduce your overall National Insurance bill without reducing your income, if you are happy to take it after age 55 instead.”

Maximise pension contributions

Alice Guy, Head of Pensions and Savings at interactive investor, says: “The recent decision on the state pension age only delays the inevitable and many middle-aged workers could have to wait until 69 or 70 before reaching their state pension age. It’s a stark reminder of the importance of private pension saving, especially if we want to retire before the state pension age and therefore will have a hole to plug.

“Budget changes to pension allowances mean you can pay up to £60,000 into your pension, up from £40,000, depending on your income, and up to £10,000 if you’ve already started taking taxable income from your pension. And cuts to the capital gains tax and dividend tax annual allowances make pension saving even more important to shelter your wealth from the taxman. You can use what’s known as Bed and SIPP rules to sell funds or shares held outside your pension and rebuy them within your pension.

“The new tax year is a good time to take stock of your pension. Check your latest pension statement and state pension age to see if you’re on track. If you can afford it, consider contributing more than the automatic enrolment amount to your workplace pension or contributing an additional amount into a SIPP or other private pension. Contributing the minimum 5% of your salary could mean your pension income falls short and you don’t have enough for a comfortable retirement.

“Consider consolidating old pension pots to make the most of your pension savings. Some pots have more expensive fees than others and even small charges take a big bite from your investment growth and could seriously put a dent in your pension wealth over time.

“More importantly, keep on regularly investing and don’t be put off by stock market volatility. It’s completely normal for share prices to move significantly and it’s not a problem if you’re a long-term investor. Even small contributions add up over time and it’s better to invest even a small amount and then hopefully increase it as you can afford it.”

Maximise ISA allowance

Myron Jobson says: “The ISA allowance remains at £20,000 for the 2023/24 tax year. While 11 consecutive base rate hikes have lifted cash ISA savings rates from the doldrums, investing via a stocks and shares ISA is likely to remain the best long-term option for ISA savers. While past performance is not indicative of future results, stock market-based investments have a rich history of producing returns that trump cash savings interest and inflation. The key is diversifying investments across sectors and regions.

“There are no limits to the number of ISAs you can have but, crucially, you can only open and contribute to one of each type of ISA each tax year. So you can have two stocks and shares ISAs, but you can only contribute to one in each tax year. You can transfer an ISA at any point in the year, but you would need to arrange for a transfer rather than selling and reinvesting to preserve your tax benefits and annual allowance. If you have multiple stocks and shares ISAs, bringing them all under one roof is convenient and can also save you money in the long run as some providers charge more in custodial and investment fees than others.”

Don’t forget your children

Myron Jobson says: “The current maximum amount you can put into a Junior ISA (JISA) each tax year is £9,000. That means a family of four can shelter £58,000 each year from the taxman. That is a sizeable chunk of money that could snowball into an impressive amount, turbocharged by the wonders of compounding.

“For example, £58,000 invested would yield a return of £14,279 over five years, rising to £32,072 over 10 years, assuming a 5% annual return and yearly fees of 0.5%. While investment returns are never guaranteed, the example illustrates the potential benefits of investing for the whole family – and the benefits of doing so through an ISA wrapper are indisputable.”

interactive investor (ii) is part of abrdn. ii is the UK’s leading flat fee investing platform for individual investors.

The information in this article should not be regarded as financial advice. Information is based on interactive investor’s understanding in April 2023. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. The value of investments can go down as well as up, and you may get back less than you paid in. Transferring pensions may not be right for everyone. You could lose valuable benefits by transferring or another type of pension may be more appropriate for you.