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Imagine this: you're reviewing your finances, trying to make sense of your savings and expenses, when you stumble upon an article about tax reliefs. As you read through, you realise you've been missing out on significant tax savings.
Why?
The answer lies in the realm of behavioural psychology, specifically a framework known as MINDSPACE. This article will explore why many of us do not maximise our tax reliefs and how understanding our own behaviour can lead us to financial optimisation.
MINDSPACE and Financial Decisions
MINDSPACE is a mnemonic developed by the Government that stands for Messenger, Incentives, Norms, Defaults, Salience, Priming, Affect, Commitments and Ego. These elements influence our everyday decisions, including those related to finance and tax planning. For instance, the complexity of tax laws or simply not knowing about specific reliefs can affect our financial behaviour and decisions.
Commonly Overlooked UK Tax Reliefs
Everyday we work with individuals to help them improve thier financial lives, and boost their financial situation. Here is a bread summary of the tax reliefs that most people can utilise.
📌 ISA Allowance: With a recent boost of a £5,000 British ISA allowance (for investment into UK-listed business), ISAs offer a tax-free way to save. Yet many of us aren't fully utilising this opportunity to save £25,000, earn interest and pay no tax.
📌 Marriage Allowance: This allows you to transfer £1,260 of your tax-free allowance to your spouse, potentially reducing your tax bill. This relief is great for couples with one person earning below the personal allowance threshold.
📌 Stamp Duty: Tax is waived on properties under £250,000, and £425,000 for first-time buyers.
📌 Capital Gains Tax: When a gain is made on the sale of an asset, tax is charged on gains above £3,000.
Barriers to Maximising Tax Reliefs
Below, the MINDSPACE model has been used to identify some of the forces diving non maximisation of tax reliefs. These forces could be the areas you give additional attention to, addressing the frictions that prevent tax maximisation.
Defaults: Our inclination to stick with the status quo often leads to missed opportunities.
Salience: If we're not aware of tax reliefs, we can't take advantage of them. Their benefits often aren't immediately obvious, or "salient", to us.
Norms: The behaviours and practices of those around us can significantly impact our own, including how we approach tax savings.
Ego: Overconfidence in our understanding of tax rules can lead us to overlook potential benefits.
Strategies to Overcome Barriers and Maximise Tax Reliefs
Strategising is the key to changing behaviour. By becoming clear on the frictions you want to address and the barriers in the way, you can build systems, processes and habits to improve your financial behaviour, and financial situation. Here are a few simple suggestions to help get anyone started.
📚 Education and Awareness: Engaging with easily digestible content on social media or attending workshops can provide access to the latest changes and opportunities. Why not follow us on Instagram and LinkedIn...
👉🏽 Self-Set Nudges: Simple reminders or automated tools can help us remember to explore our tax relief options. Add a calendar entry for the start of February each year, to check which tax reliefs you are yet to maximise.
👥 Peer Support: Sharing experiences and tips with others can demystify the process and encourage action - you will all be learning and going on the journey together.
💻 Technology-Driven Solutions: Utilising apps that suggest specific tax relief options tailored to your personal financial situation can make the process straightforward and actionable. Join our newsletter list to stay up to date - and stay ahead.
In Summary
By understanding the principles of behavioural psychology and recognising the MINDSPACE elements at play, we can overcome the barriers that prevent us from maximising our tax reliefs. This isn't just about saving money; it's about taking control of our financial future and embracing the opportunities that lie within our reach.
With a positive mindset and a willingness to take small, actionable steps, we can unlock a world of financial freedom and security. Let's not sabotage our finances by overlooking these opportunities; instead, let's embrace them and move towards a brighter financial future.
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