Act now to keep your tax bill to a minimum
HARVEY JONES OFFERS SIMPLE TIPS TO KEEP HOLD OF
THE end of the financial year on April 5 is fast approaching, so act now to make sure you don’t pay more tax than necessary.
Keeping on top of your return is more important than ever, since Chancellor Rishi Sunak’s Budget.
We will all be paying more tax in the years ahead as Sunak freezes income, pensions, capital gains and inheritance tax thresholds until 2026 to help fund the Covid bailout.
You can cut the bill, but don’t hang around as time is short.
Maximise your pensions tax relief
Most people can invest up to £40,000 in a pension this financial year and get tax relief on contributions.
Everybody automatically gets 20% relief, which lifts each £80 of qualifying contribution to £100.
Even non-taxpayers get this on contributions up to £3,600, so you can save tax-efficiently on behalf of a non-working spouse or child.
Higher and additional rate taxpayers can claim further relief on their self-assessment tax returns. There are no guarantees this will last, amid a rumoured tax crackdown by the Treasury, so make full use of this benefit while you can.
Tom Selby, senior analyst at investment platform AJ Bell, says anyone with a bit of cash to spare should consider pension contributions before the tax year ends.
“Under pensions ‘carry forward’ rules, you can use unused allowances from the previous three tax years as well as this one.”
Use tax-free Isas
Every adult can invest up to £20,000 in a cash or stocks and shares Isa and take all their savings interest, dividend income and capital gains free of tax, for life.
The Isa allowance is issued on a “use it or lose it basis”, so act before the April 5 deadline, which is on Easter Monday this year.
Sarah Coles, personal finance analyst at Har- greaves Lansdown, says those aged between 18 and
39 who are saving to buy a first property should consider a Lifetime Isa.
“The Government pays a
25% top-up on contributions of up to £4,000, giving a maximum £1,000 bonus a year.”
Parents and grandparents should not forget Junior Isas, which allow families to save or invest £9,000 a year for children, free of tax.
Just saving a little is always better than doing nothing. If you haven’t got cash to hand right now, you get new Isa allowances from April 6.
Make capital gains less taxing
If selling a second home or investment property, a business, antiques, jewellery or shares held outside an Isa, you could face capital gains tax (CGT) on your profits.
Everybody can pocket £12,300 this year free of CGT, while married couples and those in civil partnerships can pass assets between each other free of tax, and should use both exemptions.
If you hold shares outside an Isa, shift them inside your tax-free allowance through a process known as “Bed and Isa”. This involves selling shares then re-investing them through an Isa, with no CGT, provided profits do not exceed £12,300.
Sarah says: “Assets which produce an income should be held by the spouse paying the lower rate of tax.”
Check council tax relief
Councils will be able to raise rates by up to 5% if they have responsibility for social care, plus an extra £5 for local policing.
This could mean the average house in Band D rises £106 to £1,924 next year, with the average band H increasing by £212.
So, where eligible, make sure you claim the single person’s discount, council tax reduction for lowincome earners, hardship relief or the pensioner’s support.
Cut inheritance tax liability
The threshold for paying inheritance tax (IHT) has been frozen at £325,000 since 2009, and will not rise until 2026 at the earliest.
As house prices continue to grow, more ordinary families are getting dragged into the net, especially in London and the South East.
If worried, you can reduce any future IHT liability by making gifts to loved ones each tax year.
Every adult can gift a maximum of £3,000 each year – with no IHT to pay – meaning couples could gift £6,000 by April 5. You can also mop up unused allowance from last year, so couples could gift £12,000.
You could make further Iht-free gifts of up to £250 per person, provided the beneficiary has not benefited from another exemption.
Further gifts are known as “potentially exempt transfers” and only entirely free of inheritance tax if you live for seven years.
Claim tax-free earnings
Don’t forget, not all of your earnings are taxable. If you have a side business or “hustle” such as dog walking, babysitting or gardening, you can make up to £1,000 tax free under the trading allowance, says Kay Ingram, director of public policy at LEBC.
“You can generate another £1,000 from your property, for example, by renting out storage space or even your driveway.”
If you rent out a furnished room in your home, you will pay no tax on the first £7,500 under the Rent a Room scheme, she adds.
Make a little sacrifice
If you are working, check out whether your employer offers a salary sacrifice scheme, Kay advises.
This involves giving up a portion of your salary, and spending it free of tax on pensions, childcare vouchers, biketo-work and technology schemes.
Those working from home, whether they are self-employed or not, might be able to offset certain expenses such as rent, mortgage or utility bills, against earnings.
Claw back your study costs
If you have personally paid out for study courses and exam fees connected with your job or self-employment, you may claim costs against your taxable income.
You can do this through your self-assessment return, or you should make a stand-alone claim through the Government Gateway.
Mop up marriage allowance
If one spouse or civil partner in a couple pays standard rate income tax and the other does not, the higher earner can transfer £1,250 of their personal allowance and cut their tax bill by up to £250.
Claims can be backdated for a maximum of four years, provided you were married all that time, saving £1,188 in total.
Plan now to pay overdue tax
If you owe HMRC money you will pay interest on it until the debt is cleared, says Jon Yeomans, tax technical officer at Untied.
“Avoid penalties by setting up a Time to Pay Arrangement by April 1.”
You can set up a plan at the HMRC self-assessment website at gov.uk, provided you owe less than £30,000, your returns are up to date and you do not have any other payment plans or debts with HMRC.
Jon says: “Act now or face a further 5% penalty on top of what you already owe.”
Secure your child benefit
Once one parent earns more than £50,000, they gradually lose child benefit.
At £60,000, they lose it all. Earnings have increased by more than 15% since the rule was introduced in 2013, so families can lose up to £21.05 per week for a single child, or £35 for two.
Jon says those earning just above these thresholds could safeguard the benefit by making an additional pension contribution before April 5.
“HMRC deducts contributions from taxable income before applying this charge.”
Parents who usually earn too much to get child benefit should also consider claiming again if their income has dropped due to lockdown.
You can only backdate claims for three months, so don’t waste time. Call 0300 200 3100.
Just saving a little is always better than doing nothing Finance analyst Sarah Coles