In this blog we will discuss 10 tips on how to help you save tax. Advice on how to help you save tax could not be more welcome than today when inflation ravages the land. We hear the word “inflation” a lot nowadays when blame has to be assigned for the cost of living becoming less and less affordable. But what is inflation actually ? Inflation is the pace at which prices go up. What they say is true that inflation is now higher than it has been in quite a long time and people may feel its burden painfully.
Chancellor Jeremy Hunt’s Autumn Statement announced changes that will lead to many people having to pay more tax. Some of the key announcements included:
- Income and inheritance tax (IHT) thresholds are to be frozen for two more years, so will now remain unchanged until April 2028.
- The dividend allowance is to be cut from £2,000 to £1,000 in April 2023 and then reduced to £500 from April 2024.
- Capital gains tax (CGT) annual exemption will drop from £12,300 to £6,000 from April 2023. It will then drop to £3,000 from April 2024 onward.
This means it is as important as ever to make sure your money is working hard for you. One way to do this is to protect yourself from paying more tax than you need to. In this blog we look at some simple and effective ways to help you save tax, suggesting to you 10 tips on how to help you save tax.
1.Take advantage of your ISA allowance
The ISA allowance is one of the most generous tax breaks offered by the UK government. If you are over 18 and UK resident, you can pay up to £20,000 into a Stocks and Shares ISA each tax year. Your money is then sheltered from UK income and capital gains tax.
This means that if your investments go up in value, you will not have to pay capital gains tax when you sell them. And if your ISA investments generate income, you will not pay UK income tax on that either. This could be particularly useful if you are likely to be impacted by the dividend tax changes or capital gains tax amendments happening in April 2023.
An important aspect to note here is that unlike the security offered by cash, all investments can fall as well as rise in value, so you could get back less than you put in.
2. Consider the Lifetime ISA
A Lifetime ISA (LISA) is a flexible way to save and invest for your first home or later life. You need to be between 18 and 39 years old to open one such account.
You can contribute up to £4,000 of your ISA allowance each tax year (up until age 50) and like other ISAs, your money is then sheltered from UK income and capital gains tax.
One of the best things about LISAs is the fact that the government will add a further 25% to what you pay in. So for every £4 you save, you get £1 extra – up to £1,000 per tax year.
This money can be withdrawn tax free when making an eligible purchase of your first home or after age 60. Other withdrawals will usually mean a 25% government charge, so you could get back less than you put in.
Note that you will need to keep the LISA open for 12 months before using it to buy a first home.
3. Watch out for Capital Gains Tax (CGT)
Every year you can make a certain level of gains without paying Capital Gains Tax (CGT). This tax year (2022/2023) the allowance is £12,300.
Changes confirmed in the Autumn Statement mean that the annual exemption is set to take a massive blow. It will drop from £12,300 to £6,000 from April 2023 and then again to £3,000 from April 2024 onward.
This reminds us of the value of ISAs and pensions. Remember that if you make a gain on anything held in an ISA or pension, that will not use your allowance. If any gain above the allowance falls within the basic-rate tax band, there is normally 10% tax to pay. Any part of the gain which falls into the higher or additional-rate bands is normally taxed at 20%.
Higher CGT rates apply to residential property. The amount of CGT paid by Scottish taxpayers is based on UK income tax bands.
If you want to take advantage of this year’s CGT allowance before the changes come into place, you will need to do so before the end of the tax year on 5 April 2023, because you cannot carry it forward to next year.
4. Consider paying money into a pension
One of the most tax-efficient ways to save for retirement is to add money to a pension. If you are a UK resident and under 75 years of age, the general rule is you can contribute as much as you earn to pensions each tax year and receive tax relief.
Most people can pay in up to £40,000 a year (the current annual allowance), but this can depend on how much you earn or on whether you have already taken money from a pension.
You can get up to 45% tax relief on anything you pay in. For example, if you pay £800 into a pension such as a Self-Invested Personal Pension (SIPP), you will get 20% (£200) automatically added as basic-rate tax relief making a total contribution of £1,000. Higher-rate taxpayers can claim up to a further £200 (20%) in tax relief via their tax return, while 45% rate taxpayers can claim back up to £250 (25%) on top.
You must pay enough tax at the higher or additional rate to claim the full tax relief on your tax return. Different rates and tax bands apply for Scottish taxpayers.
Money in a pension can’t normally be accessed until age 55 (rising to 57 from 2028).
5. Pay into a pension for a spouse or child
Investing in a pension for a non-earning spouse or child is a lesser-known giveaway.
You can add up to £2,880 to a loved one’s pension and the government will add up to £720 in tax relief (assuming the individual is under 75), even if the individual doesn’t earn anything. If they earn more than £3,600 you can pay in as much as they earn up to the annual allowance (£40,000 for most people), and they’ll benefit from tax relief. They’ll usually be able to access the money from age 55 (57 from 2028). This will not affect how much you can pay into your own pension.
6. Divide your assets
If you are married or in a civil partnership, it is worth being aware of the special rules around the gifting of assets.
You don’t pay capital gains tax on assets you give or sell to your husband, wife or civil partner, unless:
- You separated and did not live together at all in that tax year
- You gave them goods for their business to sell on
This gives you the option of dividing your assets in order to take full advantage of your CGT allowances before they’re reduced in the new tax year. Between a married couple, for example, you could realise gains of up to £24,600 without paying capital gains tax.
Your spouse or civil partner may have to pay tax on any gain if they later dispose of the asset. Their gain will be calculated on the difference in value between when you first owned the asset and when they dispose of it.
You could also benefit if you are in different tax brackets. For example, if your spouse is in a lower tax band than you, they may pay less tax on investment income received outside of a tax wrapper.
Remember that once an asset is gifted, you can’t normally take it back.
Without any further delay, let’s continue the journey through the 10 tips on how to help you save tax.
7. Make the most of your personal savings allowance
You can currently earn up to £1,000 in savings interest before any tax is due, this is known as your Personal Savings Allowance (PSA). The amount you can earn tax free depends on your tax position (the PSA for Scottish taxpayers is based on UK income tax bands):
|Income Tax band
|Tax-free savings interest
To make the most of this allowance, you’ll want to make sure that you are earning a good rate on your cash.
8 . Make the most of your Income Tax Allowance
Every person has a Personal Allowance of £12,570. Any income received within this allowance will be tax-free. Remember that “Income” is not just what you make from your place of employment, but it includes pension income, rental income, income from offshore bonds and any other income made from a side hustle.
If you earn over £100,000, including any bonuses, you will lose your Personal Allowance. You can reclaim your personal allowance and avoid tax on your bonus by paying it into your pension.
9. Make the most of Marriage Tax Allowance
If you are married or in a civil partnership, you can transfer up to 10% of your personal allowance to your spouse or civil partner. This is just one of the ways that married couples can reduce their tax bill.
To benefit as a couple, you (as the lower earner) must normally have an income below your personal allowance (£12,500) and your spouse or civil partner must have an income below the higher rate tax threshold (£50,000). Transferring the personal allowance can save you up to £250 per in tax.
On other perk of this is that you can backdate your application up to 3 years, which may bring you an additional £750 tax saving.
10. Dividend Allowance
Everybody is entitled to receive up to £2000 per year of dividends tax-free. This is particularly useful for if you own shares (outside of an ISA) or are a director of a company.
A smart thing to do if you own a company is to consider appointing your spouse as a director in order to make use of their dividend allowance.
How can LAS Accounting Ltd help you ?
You may find the 10 tips on how to help you save tax very useful and may already consider putting them to work.
However, when it comes to navigating complex accounting areas such as taxes, you may find you want professional help. Spending less on tax means you have got more money to put towards your financial goals, and a financial adviser could help you put together a plan.
Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
Don’t hesitate to get in touch for any further enquiries at: firstname.lastname@example.org