Western Daily Press (Saturday)
Don’t let finances be quite so taxing
HARVEY JONES HAS SOME WISE WORDS ON SAVING MONEY ON YOUR TAX BILL
THE END of the financial year on April 5 is just over three weeks away and you could potentially save thousands in tax by doing some careful planning today.
Cutting your tax bill is more important than ever after Chancellor Rishi Sunak froze income tax, capital gains and inheritance tax thresholds for five years in his Budget last March, meaning we all pay more as incomes and asset values rise.
The new 1.25% National Insurance levy will add another £255 a year to the average tax bill, but now is the time to fight back. Here’s what you could save.
SWEET RELIEF
Savers can pay up to £40,000 into a pension this financial year and claim tax relief on their contributions.
Everybody gets automatic 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 an extra 20% or 25% relief on their self-assessment tax returns.
Tom Selby, senior analyst at investment platform AJ Bell, says if you have cash to spare act now: “Under pensions ‘carry forward’ rules, you can use unused allowances from the previous three prior tax years as well.” Personal pension contributions could help you beat the income tax freeze if a pay rise pushes you into the 40% tax bracket.
SALARY SACRIFICE
If working, ask if your employer offers a salary sacrifice scheme.
This involves swapping a portion of your salary for extra pension, childcare vouchers, bike-towork schemes or technology.
“This could be a clever way of cutting your exposure to this year’s income tax freeze and National Insurance hike,” says Rob Marshall, head of product and proposition at OpenMoney.
Those working from home, selfemployed or not, should check if they can offset expenses such as rent, mortgage or bills against earnings.
USE YOUR TAX-FREE ISA
Adults can also invest up to £20,000 in a cash or stocks and shares Isa and take all their interest, dividend income and capital gains free of tax.
The Isa allowance is issued on a “use it or lose it basis”, so act before this year’s deadline on April 5.
Sarah Coles, Hargreaves Lansdown’s personal finance analyst, says those aged between 18 and 39 saving to buy a first home should consider the 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 consider Junior Isas, which allow families to save or invest £9,000 a year for children tax-free, Sarah says.
MAKE CAPITAL GAINS LESS TAXING
If selling a second home or investment property, or a business, antiques, jewellery or shares held outside of an Isa, you could face capital gains tax (CGT) on profits.
Everybody can pocket £12,300 this year free of CGT. 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 of an Isa, shift them inside your taxfree allowance through a process known as ‘Bed and Isa’.
This involves selling shares then reinvesting them through an Isa, with no CGT, provided profits do not exceed £12,300.
Sarah says: “Assets that produce an income should be held by the spouse paying the lower rate of tax.”
CUT INHERITANCE TAX LIABILITY
The threshold for paying inheritance tax (IHT) has been frozen at £325,000, plus the £175,000 main residence allowance when passing on homes to direct descendants.
More families risk getting drawn into the IHT net as house prices rise, but you can reduce your liability by making gifts to loved ones before the end of the tax year.
Every adult can gift £3,000 each year with no IHT to pay, so couples could gift £6,000 by April 5. You can
mop up unused allowance from last year, so couples could gift £12,000 in total.
You can make further IHT-free gifts of up to £250 per person, provided the beneficiary has not made use of the £3,000 exemption.
If one of your children is getting married, you can gift them £5,000 free of IHT.
You can also gift £2,500 to a grandchild or great-grandchild who is getting married and £1,000 to another relative or friend.
You can make payments to help with another person’s living costs, known as “normal expenditure out of income”.
Further gifts are known as “potentially exempt transfers” and are only entirely IHT-free if you live seven more years.
A salary sacrifice could be a way to reduce your exposure to the NI hike
MOP UP YOUR 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 £1,260 of their personal allowance and cut their tax bill by up to £252.
Claims can be backdated for a maximum four years, provided you were married all that time, saving £1,220 in total.