How to keep the taxman’s hands off your money

THE END of the 2020/21 tax year is less than two months away, so you need to take action now if you want to make maximum use of your tax allowances and limit what you pay to HM Revenue & Customs.

Tax planning is particularly important this year as Chancellor Rishi Sunak prepares for his Budget on March 3, which could include a number of tax hikes to fund the pandemic bailouts.

Pensions tax relief, capital gains tax and inheritance tax could all be in the firing line.

Nobody wants to pay more tax than is necessary and a few hours of planning now could pay off.

PENSION RELIEF

Pensions tax relief gives people a real incentive to save, as it tops up your contributions by 20, 40 or even 45 per cent, depending on your tax bracket.

However this relief may be in Sunak’s sights, who may synchronise it for everybody at 25 per cent.

You can invest up to £40,000 in a pension each tax year and claim tax relief, and 40 and 45 per cent rate taxpayers may want to take advantage now.

Becky O’connor, head of pensions and savings at Interactive Investor, said: “No one wants to miss out on free money from the Government.”

ISAS

You can invest up to £20,000 in a tax-free Isa before midnight on April 5, so plan now.

AJ Bell financial analyst Laith Khalaf said Isas are a great way to save for the future because your returns will be free from income tax and capital gains tax for life: “If you do not use your annual allowance, you lose it for good.”

Many people prefer the safety of a cash Isa, but Khalaf said a stocks and shares Isa should deliver superior returns over the longer run, but with greater volatility along the way.

If worried about stock market volatility, park money in the Isa before April 5, then invest it over several months.

Younger savers aged between 18 and 39 can claim a government bonus if they invest up to £4,000 of their allowance in a Lifetime Isa.the 25 per cent top-up is worth a maximum £1,000 a year but the proceeds must be spent on a property deposit or taken for retirement from age 60.

Khalaf said you will pay an exit penalty if you take the money for any other reason, apart from severe ill health: “This is currently 20 per cent but increases to 25 per cent on

April 5.”

Remember, you can save up to £9,000 for children or grandchildren in a Junior Isa, cutting your tax exposure and helping them get on in life. “You can also pay up to £2,880 into a Junior self-invested personal pension each year, with tax relief boosting that to £3,600,” Khalaf said.

CAPITAL GAINS TAX

The Chancellor is widely tipped to increase capital gains tax (CGT) at some point.

Today, higher or additional rate taxpayers pay 28 per cent on gains when selling a second home or investment property and 20 per cent on non-isa shares, businesses, antiques and jewellery.

These rates could be increased to 40 per cent for higher-rate taxpayers and 45 per cent for additional rate taxpayers.the annual CGT tax-free allowance may also be cut from today’s £12,300.

Khalaf said now could be a good time to sell any shares held outside of an Isa, then shifting them inside your tax-free allowance, a process known as “Bed and Isa”, “You may face a CGT liability if profits on non-isa investments exceed £12,300.”

INHERITANCE

You can reduce any inheritance tax (IHT) exposure by making gifts to loved ones.again, try to act before the end of the financial year.

You can gift a maximum £3,000 with no IHT to pay, or £6,000 for couples, and mop up any unused allowance from last year.

You can make further Iht-free gifts of up to £250 per person, provided the beneficiary hasn’t received another Iht-free gift. Gifts on top of these are known as potentially exempt transfers and are only entirely free of tax if you live for another seven years.

‘Planning is important this year as Rishi Sunak’s Budget could include tax hikes to fund bailouts’

TAX BENEFITS

Higher earners face a cut in their personal allowance if their income tops £100,000 and the impact can be punitive.

Somebody who got a £10,000 pay rise to £110,000 would pay £4,000 of that in tax and lose £2,000 of their personal allowance, costing them £6,000 in total.

Khalaf said this is an effective 60 per cent tax rate: “If you contribute to a pension you can cut your exposure and claim tax relief on your contributions at 40 per cent.”

All parents are entitled to child benefit but it gets whittled down as soon as one earns more than £50,000 and is wiped out at £60,000.

“If you contribute to a pension you can cut your exposure and claim tax relief on your contributions at 40 per cent,” Khalaf said.

Charitable donations are another way to cut your income to a more tax-effective level.that way you can save money and feel good about yourself too.