As an investor or an aspiring investor, the first thing that comes to your mind when you think of the month of February should not be Valentine’s Day ;). It should either be the budget speech or the end of the tax year.
The tax year is not like the calendar year. It starts on the 1st of March and ends on the 28th of February. Understanding when it starts and ends can mean a big difference to your overall investment returns.
The income you earned between the previous calendar year’s 1st of March and the current calendar year’s 28th of February is what is used to determine the amount of tax you are eligible to pay for that tax year. The same applies to any tax benefits you should receive.
Here are some pros to understanding the tax year and timing it correctly in different cases.
1. Retirement Annuity (RA)
Investing in an RA has certain tax benefits. You can claim tax back on the contributions you made in the previous tax year when you submit your tax returns.
Suppose you invested in an RA any time between 1 March 2019 and 28 February 2020, the earliest you can claim your tax return is July 2020 (the same year).
But say we are in February 2020, and you decide to wait a few days and invest in March 2020, the earliest you can claim your tax refund will only be in July 2021! A few days can mean waiting for a full year! As time passes, it really adds up.
2. Newly employed/employed after a long time
If you have recently entered employment, your tax returns can be significantly influenced by when you start your job. See how you may stand to benefit in First Job? You could be eligible for a tax refund!
3. Tax-free savings
There is an annual limit imposed on how much you can invest in tax-free savings accounts. There is also a stiff penalty of 40% on any amount you invest over this limit, so be careful! But again, the annual limit is per tax year not per calendar year.
Similar to the RA example, your tax bill is influenced by when you invest. Any amount you invest in a tax-free savings account in February will count towards the previous tax year’s limit. In the same way, any amount you invest in March onward will count for the current year’s limit.
These are but a few of the benefits of understanding your tax year. If you are thinking of opening a tax free savings account or an RA – subject to sound financial advice – do not postpone. It makes a big difference.