It's almost that time again. Not Christmas, but time to do your personal tax return.
If you are self-employed or left employment, but have taxable income above the earnings threshold, you will most likely need to fill in a personal tax return covering the financial year 2023-24 and submit it to HMRC by 31 January 2025.
For those of us who have been doing our own Self-Assessment returns for years, this is not usually a big deal. We either sit and slog through it for a couple of days, or send our accountants a (very) large file to sort. (If we’re very organised, we might use software to do 90% of the heavy lifting and just tweak accordingly.)
However, for those who have left regular employment or have retired, it may be a whole new ballgame. As the Government’s Moneyhelper website says:
“After you've retired, you still have to pay Income Tax on any income over your Personal Allowance. This applies to all your pension income, including the State Pension.”
If this applies to you for next year:
“You must tell HMRC by October 2025 if you need to complete a tax return and you have not sent one before. You could be fined if you do not.”
So you could be experiencing the joys of completing a tax return for the first time for the 2024/25 tax year. So why is this important to estate planning?
Tax returns and financial insights
For starters, if your income is taxable, it will reduce the actual amounts you receive from your pension every month, depending how much you earn. You need to ensure that you have the right balance between your own requirements to maintain your lifestyle during your retirement, and not tie up too much in your estate planning for future generations.
This is also a good opportunity to review where your investment assets are held and if they can be made more tax efficient. As assets can potentially increase along with dividends, the allowances for the tax threshold remain the same, and some allowances are reduced (dividends, Capital Gains). So you may find you are forced into a tax bracket without realising it.
Generally, I would suggest talking to an accounting or financial professional if you have not done a tax return before, as you might miss out on crucial deductions that you simply don't know about.
The silver lining
However, I do think there is a hidden benefit to at least preparing your figures for a personal tax return (yes, I really do). It is one of the most straightforward ways to take stock of your finances and take time to work out what you are actually spending on specific items, rather than what you think you are spending.
You usually don't need a complete breakdown on expenditure if you are not working or wanting to claim any deductions, but it is still very useful. It's a sort of budgeting in reverse. By dividing up spending into categories (utilities, groceries, eating out, subscriptions and memberships, etc), you can soon spot where money is spent well - and not so well. It’s also an opportunity to spot ‘stray’ payments like insurance for a phone you no longer own, or tv services you no longer use, etc.
It will also throw into perspective the major costs in your life, allowing you to review them after the tax return is in, and check if you might get a better deal elsewhere.
It might also reveal the 'hidden' costs of not working all day, for example, such as the heating on more during the day, increased fuel costs for the car, extra holidays. Compare these against the costs of commuting to work, business clothing, tools and equipment, and more.
None of this will affect the amount of tax you pay per se, but it could help you reduce your outgoings. So you can get more enjoyment from your pension and other incomes when you stop working.
A clearer view
Now when you come to your estate planning, you have a much clearer view of what 'life' costs and can work out how much you can afford to leave as a legacy, given a lifespan of approx. 25+ years after retirement.
Remember to include long term care costs into your calculations. As we've said many times before, there is no point in nailing down everything so tightly in your estate planning and Trusts for the next generation, only for you to then require much more that you thought to pay for long term care, and your family having to bail you out.
So, if this is your first tax return year, welcome it and see it as an opportunity for a holistic overview. Or at least, less of a chore and more of a review!
Help with estate planning
Start your estate planning with a 30 mins Discovery appointment with me, for free. We can discuss your unique situation, your aspirations and goals, and then go into more depth once we agree we're a good match to work together.
DISCLAIMER: The information and opinions in this article are for informational purposes only. They do not constitute any form of financial or legal advice and should not be relied on or treated as a substitute for specific advice relevant to your individual circumstances. In places we may refer to external websites for further information, but we are not responsible for the content of any external Internet sites.