We are in a relatively unique financial situation. UK base rates currently stand at 0.1%, and there is minimal interest on savings accounts. There was even talk of UK base rates moving into negative territory. However, the short-term odds of such a move seem to have lengthened after Brexit.
We will now look at several ways to save money in 2021 and beyond.
Consider remortgage opportunities
There are several remortgage options to consider, such as switching to a short-term fixed-rate or an offset mortgage. As the vast majority of mortgage arrangements are now repayment, combined capital and interest payments, you should be able to take advantage of reduced rates, especially for lower loan to value (LTV) ratios.
The following table illustrates the current mortgage rates with HSBC on varying LTV ratios, compared to the 3.54% standard variable rate:
|Mortgage||60% LTV||Saving||70% LTV||Saving||80% LTV||Saving|
|Two year fixed rate (no setup fees)|
|Five year fixed rate (no setup fees)|
The potential savings on high LTV ratio mortgages are likely to be more generous in reality. This is because the standard rate would be higher for an 80% LTV mortgage than a 60% LTV rate because of the risk/reward ratio.
While the LTV ratio on your original mortgage application may have been relatively high, it may have fallen when looking to remortgage. This could be due to an increase in your property's value and the accumulation of mortgage repayments already made. Therefore, you may be able to enjoy the double whammy of remortgaging on a reduced LTV ratio and reduced interest rates. Well worth investigating!
Many people may be tempted to look towards an offset mortgage. This type of arrangement will take into account savings, thereby reducing long-term interest payments. Unfortunately, discounted rates and standard variable rates for offset mortgages are not as competitive as those available for traditional repayment mortgages. Therefore, the short-term benefits are limited, but there are significant long-term savings and reduced mortgage terms.
One of the best ways to increase your long-term savings is to make pension contributions where possible. This not only allows you to save for your retirement, but you can also take advantage of tax relief provided by the government. The following table illustrates the benefits:
|Tax rate||Pension contribution||Tax relief||Pension fund payment|
|Basic rate at 20%||£8000||£2000||£10,000|
|Higher rate at 40%||£6000||£4000||£10,000|
|Additional rate at 45%||£5500||£4500||£10,000|
The limit for tax relief on pension contributions is £40,000 for the tax year 2020/21. If you make additional pension fund contributions above this level, they will be subject to income tax at the highest rate you pay. It is essential to take professional financial advice regarding pension fund contributions, to ensure that you are maximising your tax relief.
Many people are unaware of various tax breaks offered by the government, one of which is the marriage allowance (only applicable to basic rate taxpayers). This relates to a husband, wife or civil partner. Where eligible, you can transfer part of your tax-free personal allowance. For example, in the following scenario:
Your income: £11,000
Partner’s income: £20,000
Each individual has a personal allowance of £12,500 per annum, on which they will not be charged income tax. In the above situation, you would pay zero income tax. However, your partner would pay tax on earnings of £7500 above their personal allowance. This equates to £1500 at the 20% basic rate of tax.
Under government regulations, you would be able to transfer a maximum £1250 of your personal allowance to your partner. Consequently, this would increase their tax-free allowance for the year from £12,500 up to £13,750. At the current 20% basic tax rate, this equates to a tax saving of £250 per annum. This can be backdated to 5 April 2016 with a potential tax rebate of £1188:
|Tax year||Maximum tax rebate|
After applying for the marriage allowance, this will be automatically processed each year until you cancel it.
It is vital to take advice when applying for the marriage allowance. Where one of you was born before 6 April 1935, you may benefit more from a married couple's allowance. You cannot apply for a marriage allowance and a married couple’s allowance at the same time.
Lifetime Individual Savings Account (ISA)
The UK government introduced a range of tax-efficient savings plans, as a means of encouraging individuals to save for later life. The Lifetime ISA is one such plan, although many people fail to take advantage.
Maximum annual contribution: £4000
Government bonus: 25% (up to a maximum £1000)
Lifetime ISA's were created to allow individuals to save money for their first home or retire at 60. You can invest funds within these plans in stocks and shares or cash. You can also withdraw funds from your Lifetime ISA, without any penalties, if you are terminally ill with less than 12 months to live.
Under current regulations, you need to be aged between 18 and 40 to open a Lifetime ISA. You can make maximum contributions of £4000 each year (with the government bonus on top) until you reach 50. While your funds are effectively locked in until you buy your first home, or turn 60, this is a tax-efficient way of saving for the future.
If funds are withdrawn for any other reason, a charge of 20% (rising to 25% on 6 April 2021) would be charged against all withdrawals. This effectively allows the UK government to clawback historic bonus payments.
Reducing general/everyday expenses
We have deliberately stayed away from the traditional means of reducing general/everyday expenses, instead focusing on maximising your savings. That said, there are many other means by which you can reduce your regular expenditure, increasing your savings. These include:
- Switching to credit cards offering 0% transfer/introductory rates
- Cancelling underutilised memberships such as gym subscriptions
- Actively switching your utilities to cheaper deals
- Consolidating personal loans/credit card balances
- Taking advantage of online promotional offers for everyday products
In isolation, the above opportunities to reduce your everyday expenses are limited. However, the accumulated impact can be significant and is certainly worth pursuing.
Reduce your expenses, maximise your savings
As we have covered above, there are numerous ways in which you can reduce your outgoings, while maximising your short, medium and long-term savings. Many people are also unaware of various tax reliefs such as the marriage allowance, which equates to more than £1000 if backdated to 2016. The internet has undoubtedly assisted those looking to take more active control of their finances. However, it is still advisable to take professional financial advice, especially when looking to maximise tax relief.