Resolutions are everywhere at this time of year and reducing your tax bill is one of the easiest ways of ticking off something from the “sort my finances” list. The deadline for filing your self-assessment tax return online is January 31, 2020 and the end of this tax year is only three months away, so time is ticking for savers and investors.
Max Out Your Allowances
A simple start that experts recommend for reducing your tax bill is to use up your available tax allowances for the 2019-2020 financial year.
These include: the £20,000 Isa allowance, £4,368 Junior Isa allowance, and a £4,000 Lifetime Isa allowance (although this counts as part of your overall £20,000 Isa allowance). For those investing outside of the Isa wrapper, the capital gains tax allowance is £12,000 for this year. “Bed and Isa” also allows you to sell shares outside and Isa and buy them back, giving your investments greater protection from the taxman.
Save For Your Spouse
Married couples or those in a civil partnership can also transfer £1,250 of their own personal allowance to their partner as long as one of you earns less than the £12,500 personal allowance (the amount you can earn before you pay income tax). This can save up to £250 a year in tax.
Many people confuse the “Marriage Allowance” – which kicked in on April 2015 – with the “Married Couple’s Allowance”, which is available to people born before 1935, so mistakenly assume they are not eligible for this benefit (you can’t claim both allowances.)
The dividend allowance of £2,000 and personal savings allowance (up to £1,000 in interest and income) provider another helpful boost for those investing in shares or cash.
Pay Into Your Pensions
Another way to reduce tax and boost your retirement pot is to make sure you use up your entire annual pension allowance, which is currently £40,000. Patrick Connolly, a chartered financial planner at Chase de Vere notes that the actual cost of a £40,000 pension contibution to a higher-rate taxpayer is just £24,000, an immediate 40% boost.
Additional rate taxpayers enjoy tax relief of 45%. Making additional pension contributions could also help keep your income tax allowance below a certain threshold or help keep your child benefit payments, Connelly points out.
Use Tax-Efficient Investments
The £40,000 annual pension allowance reduces if you earn more than £150,000 a year – the allowance is reduced or “tapered” by £1 for every £2 you earn over this amount. This is controversial among higher-earners and has led to money pouring into VCTs and enterprise investment schemes instead to take advantage of the tax perks.
There are plenty of options for investors to reduce their income tax, especially if they invest in smaller companies through venture capital trusts or enterprise investment schemes. For example, investors in VCTs can get income tax relief of 30% on investments up to £200,000 in the tax year as long as they hold their shares for five years.
But Connolly warns that their high exposure to unquoted companies means they are not suitable for the average investor: “VCTs should only usually be used by those who have a big investment portfolio already and who understand and accept the risks involved.”
Give Gifts
Inheritance tax is one of the most hated taxes out there, but there are a number of options for those looking to reduce the size of their estate’s liability for inheritance tax. IHT is paid at a rate of 40% on an individual's assets worth more than £325,000. There is, however, an additional allowance for property.
But each individual has an annual gift allowance of £3,000, which is immediately exempt from IHT. You can top this up to £6,000 if you didn't use the allowance in the previous tax year too. A married couple could give £12,000 a year in this case, Connolly points.
Many people also use their will to make gifts to their favourite charity, which has the added benefit of reducing the inheritance tax bill to bill paid. A legacy in your will to your charity doesn’t count towards the value of estate. A gift of more than 10% of your estate to charity will cut the inheritance tax charge from 40% to 36%. With the average IHT bill around £200,000, according to HMRC, that could reduce your bill to £180,000.
Keep an Eye Out for Changes
A Budget is expected as early as February, having been delayed from November because of the election and this could bring in some key changes that will affect your personal finances.
In his pitch to be Conservative party leader, Boris Johnson proposed to change the higher rate of income tax from £50,001 to £80,000. The party has previously suggested it will undergo a regime of lower taxes and higher spending.
There have also been calls for the Government to simplify the UK's complex tax system. Other potential changes to keep an eye out, which could affect our personal finance, include scrapping the pension taper, increasing the inheritance tax threshold, and a review of Isas.
