The gradual reduction of disposable income due to inflation and changes in tax brackets, or frozen tax allowances, will weigh on your finances, causing ‘fiscal drag.’
By implementing various strategies, you can potentially reduce the impact of fiscal drag on your investments and increase your chances of achieving your long-term financial goals.
The worst thing to do is – nothing. By succumbing to inertia, you are more likely to pay increased levels of tax, whether in relation to Income Tax due to the frozen personal allowances and reduced Dividend Allowance, or other taxes including Capital Gains Tax (CGT) and Inheritance Tax (IHT).
The good news – there are legitimate mitigation strategies and, depending on your personal circumstances, allowances and tax reliefs available. By using your Individual Savings Account (ISA) allowance or making your pension contributions early in a new tax year, you could benefit from extra potential growth, as well as receiving an element of your tax relief earlier on your pension and any pension contributions. Consider tax-efficient investments, diversify your portfolio and rebalance regularly to ensure your asset allocation remains aligned with your objectives and attitude to risk; rebalancing will help minimise the impact of fiscal drag over time.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.
