Cut down your tax bill without relying on Hunt
BRITONS will be hoping Jeremy Hunt grants them a tax cut in today’s spring Budget but there is plenty people can do to pay less to HMRC without relying on the chancellor.
Any cuts will be a drop in the ocean compared to the impact of Hunt’s decision to freeze income tax and National Insurance thresholds until 2028, said Sarah Coles, head of personal finance at Hargreaves Lansdown. “You need to make full use of all tax relief and allowances available but many aren’t aware they exist.”
Most taxpayers know they can earn £12,570 a year before income tax under their personal allowance (without Hunt’s freeze that would be closer to £15,000).
Low earners with cash in the bank can also take £5,000 in savings interest-free, using an overlooked tax break called the starting rate for savings.
Every £1 of income above your personal allowance shrinks this by £1, so someone earning £3,000 extra could take £2,000 of savings interest tax-free. The starter rate stops once earnings hit £17,570. The personal savings allowance applies to more people and is better known as a result. This allows basic rate taxpayers to take £1,000 worth of annual savings interest free of tax. This figure is £500 for higher-rate taxpayers.
Premium Bonds also have tax benefits, Coles said. “Whether you win £25 or £1million, prizes are completely tax-free.”
Savers and investors with large sums in an Isa can draw as much tax-free income as they like annually. Each year they can take £1,000 dividend income from shares held outside of an Isa too.
However, the dividend allowance falls to just £500 from April 6, thanks to Hunt.
If you have a side hustle, such as gardening or selling on eBay, the trading allowance lets you take the first £1,000 tax free.
Taking in a lodger can generate tax-free income too. “If you rent out a furnished room there is no tax on the first £7,500 under the Rent-a-Room scheme.”
You can make another £1,000 tax-free from your home, say, by renting out your driveway.
Complex investment schemes designed to encourage experienced investors to put money into smaller UK businesses also offer income tax benefits, such as venture capital trusts (VCTs) and the enterprise investment scheme (EIS).
Coles said: “Income from a VCT is tax-free up to a maximum of 30 per cent of the amount invested, capped at £200,000 a year. VCTs are also free of capital gains tax.”
While the income paid by a standard lifetime annuity is taxable, that is not the case with a purchased life annuity bought with money that is not in your pension pot.
“Part of the income paid is deemed a return of your original investment, and is tax free.”
Couples who are married or in a civil partnership and share assets can double up their allowances, to generate a larger tax-free total income, Coles said.
Tax relief on pension contributions can also reduce the amount that HMRC takes.