How to get your financial house in order for 2012

Wednesday, February 01, 2012

How to get your financial house in order for 2012

1. File your tax return (and pay any tax due) no later than 31st January 2012
A late submission will cost you a fi ne of at least £100, plus interest is charged on any tax due. UK residents are taxed on their worldwide income, including rental income from overseas property. Where there is a double taxation agreement in place any tax deducted by another jurisdiction may be offset against the UK liability.

2. Trim the tax you pay
Filing your tax return provides a good reminder to review your affairs and see if you can reduce the amount of tax you are paying. The starting point is to ensure you are making the most of your tax breaks and allowances. For example, holding taxable investments, including overseas property, in the name of the spouse who pays the lowest rate of tax will save up to 50p tax in the £1. Understanding what expenses you can offset against overseas property income is also important. Take advice if you need it. Shelter cash and other investments in tax efficient wrappers such as ISA. UK residents can shelter up to £10,680 in ISA each year of which £5,340 can be cash.

3. Pay down debt
2012 is likely to be another year of slow growth, low interest rates, sluggish housing market and austerity measures. Take the opportunity to use low interest rates to reduce any debts, paying down the most expensive first. Paying down debt is almost certainly one of the best investments you could ever make. In my view there is no such thing as “good” and “bad” debt – there is “manageable” debt, borrowing sensibly for things you need which you can't afford e.g. a house, and “bad” debt, borrowing to invest in speculative investments, or for things you don't need.

4. Minimise your risk
One “Armageddon” scenario is the collapse of the Eurozone. This seems unlikely, as the countries in the Eurozone will probably do everything in their power to prevent it. However, if this were to happen we would experience a fall in stock markets, a further credit crunch and some banks with exposure to the Eurozone might fail. For these reasons you should not hold more than £85,000 in accounts per person per banking institution. This keeps your savings safely within the Financial Services
Compensation Scheme limits. Alternatively stick with NS&I accounts which are backed by the UK Government. With your investments spread your risk by diversifying – don't hold all your eggs in one basket.

5. Don't sit on the sidelines
Naturally during poor economic times, the temptation is to keep your money in cash and invest when the outlook improves. However, the problem with this approach is that your cash savings are almost certainly earning less interest than the rate of inflation, meaning the spending power of your savings is falling. Generally, companies are doing well at the moment: they have already been through the pain of recession, are making profits and hoarding cash ready for inward investment. Your plan should be to hold cash but not too much and take a longer term view with the balance. Historically investing in the stock market has been one of the best ways to protect the value of your portfolio from the effects of inflation. Many investors drip feed their cash into the market on a monthly basis using a regular savings plan, which can allow you to benefit from the volatility.

Please note that stock markets fall as well as rise and returns are not guaranteed. Tax rules are subject to change.

Author

A Place In The Sun