Tax Year-end Review: 2020/21

Another tax year is over and despite the calamity that has befallen all of us, we (like many) are better off now than a year ago.

This last year has been quite tumultuous for a number of reasons but it’s funny that it’s been spent almost entirely at home. That gives the days, week and month a sort of uniformity reminiscent of Groundhog Day except Bill Murray wasn’t woken up by a milk-thirsty toddler who’s perpetually in a bad mood in the morning.

I re-read my posts from the end of 2018/19 and 2019/2020 recently and it’s different this time.

The Lady has been in 3 jobs in the year after her old company downsized (or whatever the word is) and she found a new job that she hated and now a better job that she loves. I’ve been working away as contractor/consultant engineer but was only really employed half the time. My income took a bit of a hit over the year which scared me but once it happened, it didn’t scare me that much.

Where we saved money by not holidaying as much in 2020 we made up for it by spending it on floors. Spending was high but under control and beneath our means. The big hitter being childcare which is now in excess of £1,800 a month for both the Master and Little Lady 5 days a week. (the Master is in school this August and then more funding will come in for the Little Lady which will help significantly).

Most significantly, our net worth has jumped by over £200,000 in the space of 12 months. Most of that in the rampant bull run.

Spending

  • Total Spending in Year = £46,500 (£3,870/month)
  • Total Spending less Childcare = £32,400 (£2,700/month)
  • Spending on Childcare = £14,100 (£1,170/month)
  • Household Expenses = £9,600 (£800/month)
  • Mortgage Interest = £2,500 (£210/month)
  • Car Depreciation = £1,300 (£110/month)

Income

  • Pension payments = £18,800 (£1,560/month)
  • Take Home pay = £60,800 (£5,060/month)
  • Tax Paid = Far too Much
  • Dividends = £37,000 (£3,100/month)

This includes money from my side hustle which was £26,000 for the year or around £2,000 per month.

What is not so great is my paid work for the year which was great last April to July then died a bit before coming back to life at the end of the year. But the funny thing is that I don’t really care that much especially if earning more would add to the stresses in my life. Also, since we spend less than we earn, earning more isn’t going to make our lives any better I don’t think. That’s the benefit of a bit of savings and the confidence to not lose hope or perspective.

Assets

  • Net Assets: Year start = £860k year. Year End = £1,066k (£206k / +24%)
  • Pensions: Year start = £441k year. Year End = £556k (£115k / +26%)
  • Fire Funds: Year start = £366k year. Year End = £433k (£67k / +18%)
  • Housing Equity: Year start = £53k year. Year End = £77k (£24k / +45%)
  • House Value: Year start = £246k year. Year End = £260k (£14k / +5.7%)

See that jump in equity vs. the house value? That’s partly due to the wonder of leverage [LINK] but also the paying off of debt (still another ~20 years to go).

Ratios and Whatnot

  • Basic Savings Rate = 1 – (£46.5k / (£18.8l + £60.8k)) = 42%
  • Total Saved = £33.1k = 3.8% of net worth
  • Asset Growth = £173k = 20% of net worth

From this, you can see that whilst saving money is nice, owning assets is even better. These numbers are a bit inflated since a year ago, markets were on their knees and it was their recovery that really flatters things. Looking at the longer term, our net worth is increasing at a similar rate as before – business as usual.

Personal Withdrawal Rates

You can see from the graph that compared to March 2020, our personal withdrawal rates have come down significantly but are more or less where they were in March 2019 – if anything a bit higher. I define personal withdrawal rates as the percentage of your assets that you spend each month if annualised. So, if you have a net worth of £600k and spend £5k a month that’s £5kx12 = £60k / £600k = 10%. We are sitting at around 4.5% on our total spending on our total net worth. However, since half of our money is tied up in pension and we can’t access them [LINK], I look at our Pre-pension funds (or FIRE funds). Here we are burning through our money at almost 12%! Or to put it another way, if we keep that up we’d run out of money in 8 year’s time. Of course the major (temporary) expense for us is childcare, so I lop that off and it gives us around 7.5% which get us close to our normal minimum retirement age.

Levers to Pull

If you want to hit your respective Withdrawal Rate targets you have 4 levers to pull.

  1. Get more money

It’s obvious that earning more can get you the money you need to grow your wealth. But don’t neglect the power of inheritance, larceny or lottery. A side-hustle is another option but if you play the long game, focusing on growing future income might pay-off better.

  1. Spend less money

That seems obvious

  1. Invest wisely

Money that’s left over between coming into your hands and being spent can be invested in different ways. Get rich quick schemes aside [LINK] you should look at avoid high fees but more important is where your funds are invested. For many Pensions offer the best return due to tax benefits

  1. Move the goal posts

Some people use a SWR of 4% or 5% or 6% or whatever – changing it can make you feel better. I used to not include the state pension in my net worth figures, I still don’t but I’m beginning to think that maybe I should. I don’t even use the CETV for my final salary pension (but blogged about it) – but if I did, I’d have much higher numbers. Likewise, I don’t count on an inheritance but I know people who do. And I take off nursery fees on my numbers even though my wonderful kids will never every become cheap, self-financing or even, dare I say it, profit centres.

Plus ça change, plus c’est la même chose?

What should we do in the year ahead with our finances? Some things seem like they will continue unabated like 1) overall monthly saving of income 2) net asset growth 3) never truly reaching a 4% PWR. If these things are inevitable maybe we should just ignore the rules and 1) get less money 2) spend more money. I’m leaning towards getting a cleaner to come once a week. Weekly cost ~£40, annual cost £2,000. However, if it means that instead of us using our precious free time to clean (normally at weekends when I’d like to read/nap/relax) then it might be worth it. I’ll think about it.

The same sort of problem arises with buying our food to cook for ourselves or getting takeaway. I keep records of our spending and here’s what we’ve spent on shopping (including booze at home) and takeaway (or food outside the house, like a coffee & cake after a hill walk). The results show that our shopping spend is slipping a bit and eating out is going up.

Gone are our meals out in cafés or restaurants or when travelling – since all that is closed. But we are getting take away a lot after work. Since we both work from home until around 5pm and then we go to pick up the kids; if we take them to the playpark we can easily get home after 6pm. Who wants to cook then when the kids are in bed at 8pm? Take away is a pragmatic choice (if not economical or healthy one) and we’ve got a decent selection of good places nearby to chose from (but you need to order early to avoid a long wait). It might seem that this pandemic has lead lots of poeple to order more takeaway food and more people to be forced into slaving away as delivery drivers just to make ends meet. In typical rentier fashion, the UK has managed to make profiteering off the back of food delivery a(n almost) national celebration of capitalist endeavour (much like how the royal road to riches is pathed by bricks and mortar and paid for by renters money and subsidised by the government).

I try not to order through the usual apps – I pretty much know what we want and am happy to go old school and phone through my order.

On a more mundane level, the 2021/21 tax year will see us filling our LISAs, ISAs, diverting money to our SIPPs, not funding JISAs, not overpaying the mortgage, selling some VCTs. On a more experimental level, I am thinking of becoming a non-taxer. Since I run my own Limited company, I can chose where the money goes and if money is paid as a salary, dividend or just held in the company. If I don’t pay our much in dividends and keep a modest salary going, I will be below the threshold for income tax and if I lend the company money (upcoming corporation tax due) then I can pay myself (usurious) interest from the company and dump the rest to SIPPs.

  • Personal Allowance = £12,570
  • Personal Savings Allowance = £1,000
  • Dividend Allowance = £2,000
  • Starter Rate for Tax = £5,000
  • Total tax free allowance = £20,570 (and of that £18,570 reduces my corporation tax bill by £3,528)

I’ll post about this later but it’s something I’m looking into. That’s about it – I’ve tried to put the reason and rationale in front of emotions but overall it’s been a good year. As I keep saying, this Covid lockdown has been a godsend for me – no commute, lower stress, still earning, more time with the kids and life is good.

How was your 2020/21 tax year?

14 Comments

  1. We are the same, our lowest spend year living in London – higher than yours and we don’t have childcare 😦 during a crazy bull market being pumped up by the govt. printing money. If only we had thrown cash into bitcoin & GME then we could’ve won capitalism.
    The unsung hero of your numbers is the side hustle – understand you don’t want to post about it, but it pretty much covers your embedded expenses, so wifes work etc is gravy!
    Is withdrawal rates a challenge? if you are earning more than you spend (from income) its pretty sorted while that continues isnt it? Still growing the pot.

    Liked by 1 person

    1. Thanks,

      I think London brings a lot of opportunities for spending that you just don’t get elsewhere- our spending whilst high is well within our means.
      When it comes to SWRs – my view is that your actual spending in the past is no use for an early retirement plan. And the huge focus on being frugal can actually hold you back from earning more or enjoying life more. As you say, if your pot is still growing why worry about SWR? I don’t really and my plan for the year ahead is to shovel more into the pension because it is better now for me to have the tax advantage even if I can’t touch it for 20 years.
      Similar for the LISA, people who don’t like it but will fill their ISAs up seem to forget that there is virtually no chance of them ever completely emptying their ISAs before pension age – so why not take the free money now?

      Like

  2. Stress testing: the stock markets will soon crash by 60%. We will face stagflation and increased unemployment. What precautions to take?

    Unstress test: the markets will rise for another 18 months, then GFF will sell most of his equities, clear his mortgage, reinvest at the bottom, and live happily ever after.

    Apocalypse test: the US will launch wars in the Ukraine, around Taiwan, and against Iran. Meanwhile, an asteroid …

    Like

    1. Haha – I don’t think that I hold the equities that could fall by 60%.
      Even then, I am still earning and in a career position that is quite strong and I have navigated 7 lean years and come out richer.
      Whilst I am still earning and saving I have no fear of market crashes and would rather prices went down rather than up.

      Like

  3. “But the funny thing is that I don’t really care that much especially if earning more would add to the stresses in my life. Also, since we spend less than we earn, earning more isn’t going to make our lives any better I don’t think.”

    Completely agree with the above statement. There comes a point where the marginal gain you may get from earning more money just isn’t worth the potential extra stress.

    If you’ve been living below your means for a while any extra money tends to just get invested. The LTA freeze means I should probably stop contributing so much to my pension. If I do that I’ll then be paying a lot more income tax though so perhaps requesting part time work may be the way to go.

    Modelling the “optimisation” of your tax exposure is worth doing. For the last 2 years I’d mostly taken myself out of income tax by aggressively using salary sacrifice. Sadly this is no longer an option as I’ve used up my pension carryover.

    Once I pull the early retirement trigger I’ll be endeavouring to access my funds in the most tax efficient way possible too.

    Well done on the impressive net worth increase.

    Like

    1. Thanks,

      I have the flexibility of being able to store LTD company income before paying out in dividends/salary (as well as covering other costs) which means that I can take advantage of the arrangement.
      I am nowhere near the LTA and the Lady is even farther away, and we have enough carryback to withstand a major upshot in income if it were to happen.

      Like

  4. 20K tax-free available if you control your business correct? I assume there must be some form of law to stop you setting yourself up as your own ‘wealth manager’, moving your SIPP to ‘G.F. Financial Solutions’ and which charges ~2% assets under management fee, taken out as salary, dividends etc to the owners.

    Liked by 2 people

    1. I don’t have to take any money out of the company at all and if I lent the company money then I could pay interest on that money.
      The 20k is all on personal taxable income or interest. It’s just that the 5k starter rate for interest disappear s if you go above a certain level of income/interest.

      Liked by 1 person

  5. Great update, GFF, thanks for sharing. Hear what you’re saying on the Groundhog Day thing, the weekdays seem like that for me!

    Interesting you mention the takeaway thing – I can count the number of takeaways we had in 2020 on one hand and we’ve had one this year so far. That said, I do buy ‘takeaway’ type food occasionally, ie rather than order a Domino’s, I’ll buy a frozen pizza for a couple of quid, add my own toppings and will bang that in the oven if I can’t be bothered to cook properly.

    I have a couple of friends who do what you are planning to do, ie they’re non-tax payers because of how they pay themselves as Ltd companies. Why not, when you are able to do so?

    Liked by 1 person

    1. Thamks Weenie,

      Our takeaway addiction is part convenience part lifestyle and part laziness.

      The tax thing is an upshot of the plan for deaccumulation we all thought about.
      If we don’t need the money right now and there are real advantages to putting it into pensions, then why not? Dual income gives a bit of flexibility to optimise after all and if you aren’t eligible for benefits you may as well make your self ineligible for tax.

      Liked by 2 people

  6. I’ve been reading your blog occasionally, and had to comment today — wow, we’re in fairly identical positions in terms of financials. NW ~£1.2MM, with childcare, ours costing more at £2.3K for both our kids, our son also starting school in Sept and our daughter just going on 2. Just checked our graphs and we were starting at £300K back in March 2016, so slighly steeper climb probably due to all our wealth in equities.
    Probably the major difference is that we spend a lot on rent (by choice, also, London). Also, our kids’ bedtimes a lot earlier than yours 😉
    Thanks for sharing your numbers! Makes me think I need an accountability journal too, to help putting our numbers and perspectives.

    Liked by 1 person

    1. Thanks Liz,
      The childcare costs are unreal but coming to an end soon (although breakfast and afternoon clubs aren’t free!)
      Well done on the higher NW growth – we’ve arguably lost out through only enough equity exposure and too much elsewhere but then again, our incomes haven’t been as high as previously as we are focusing more on life instead of work. Or maybe it’s the mega bucks that you get paid in London.
      Keep reading!

      Like

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