Be aware of ‘fiscal drag’

Frozen allowances, such as the personal allowance and higher rate threshold for Income Tax, coupled with the gradual reduction of disposable income due to inflation, will weigh on your finances, causing ‘fiscal drag’. 

You can potentially reduce the impact of fiscal drag on your investments by adopting various strategies, thereby increasing your chances of achieving your long-term financial goals. 

The worst thing is to do nothing. By succumbing to inertia, you are more likely to pay increased levels of tax, whether that’s Income Tax due to the frozen personal allowance and reduced Dividend Allowance, or other taxes such as Capital Gains Tax (CGT) and Inheritance Tax (IHT). 

The good news is that there are legitimate mitigation strategies and, depending on your personal circumstances, various allowances and tax reliefs available. 

By using your Individual Savings Account (ISA) allowance or making pension contributions early in a new tax year, you could benefit from extra potential growth, as well as receiving an element of pension tax relief on contributions earlier on. 

We can help you consider tax-efficient investments, while diversifying and rebalancing your portfolio regularly helps ensure your asset allocation remains aligned with your objectives and attitude to risk; rebalancing will help minimise the impact of fiscal drag over time. 

It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.