How To Encourage Earlier Tax Planning

It may be human nature, but putting off tasks until just before a deadline can cause an administrative headache for advisers when it manifests itself at Tax Year End (TYE) when clients are rushing to finalize their tax planning.

In some cases, there’s little clients can do to avoid having to rush. Those who are self-employed may need to wait until the very end of the tax year to fully understand their earnings.

Similarly, those who receive bonuses often won’t have them paid until March, meaning they simply can’t take action until there are only a few days of the tax year left.

But for other clients, it may simply be a case of inertia.

For advisors and clients alike, there are benefits to not leaving tax planning, wherever possible, until the TYE deadline looms.

Here are a couple of ways that advisors can help encourage early action:

Highlight the financial benefits of early action

Clients may not always be aware that prompt tax planning can have benefits beyond simply not losing out on allowances. So, to encourage earlier planning, it may be worth stressing the investment return potential of investing earlier, rather than later.

We do see many clients rush to place money into investments just before the end of the tax year – potentially reducing the amount they could have benefitted by if they’d acted earlier.

In fact, abrdn research data highlights that in the final week of the 2021/22 tax year, more than a quarter (27%) of new Stocks and Shares ISAs on the firm's Wrap platform had the maximum £20,000 allowance invested in a single transaction.

This compares to 29% in 2021, and a fifth (20%) in 2020.

For many, acting just before TYE will be considered tax planning and potentially the earliest that they can put money into such allowances. But for others, it might be an avoidable case of a last-minute rush, and they potentially could have achieved better outcomes by feeding in funds gradually over the course of the year.

For advisors, translating the benefits of earlier action– ideally with the help of worked examples, showing how clients’ investment performance and tax position in the preceding year could have been different had they made decisions earlier – could pay dividends in more ways than one.

Underline the risk of "use it or lose it"

Along with taking early action, advisers could consider emphasizing why it’s important that clients respond quickly to changes in allowances or regulation that could fundamentally reshape their tax planning.

This is a shifting legislative environment. Clients can’t always count on allowances and limits that they’ve relied on in the past still being available, at the same rate, in the years ahead.

Where allowances are changed or removed, clients need to move promptly to understand how it could affect them and whether it’s important that they make the most of allowances or limits as they stand, before they change, and time runs out.

For example, the annual Capital Gains Tax (CGT) exemption is to be cut from £6,000 in April 2023, and then cut again to £3,000 from April 2024.

This means maximizing the current allowance of £12,300 before TYE is crucial to limiting the amount of gains that may be exposed to CGT. Even if clients don’t need the cash, taking profits within the £12,300 CGT allowance and re-investing these proceeds means there will be less tax to pay when they ultimately need to access these funds.

For example, if the client is part of a family office looking to reinvest and they have already used up their own ISA allowance, they could potentially use their spouse’s ISA allowance or look at Junior ISAs for any children.

The CGT exemption change is a good example of how missing the boat in one year can mean having to wait many years until it reaches a similar level again, if it ever does.

Unlike "use it or lose it" ISA allowances, clients can’t assume that if they miss this TYE deadline, they’ll be able to catch the same allowances and exemptions this time next year.

The value of advice

Although advisors can also drop an email or a text to proactively remind clients of the TYE deadline, ultimately, the decision to engage early and promptly with tax planning is one that clients have to make.

But there’s much advisors can do to support them in this journey – it’s a key part of the value and peace of mind that advice brings.

This year, take the opportunity to review clients’ planning behavior, and where it’s possible, recommend improvements going forward.

The value of investments can go down as well as up and your clients could get back less than they paid in.

The views expressed in this article should not be regarded as financial advice.

Any reference to legislation and tax is based on abrdn’s understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.