We all need to get as much out of each pound as possible, right now. With a series of tax increases announced in the Budget, adding to the general squeeze.
Being as tax efficient as possible can really help. This means paying your full tax liability to HMRC, but making sure you’re not paying any more than that and that you’re getting all the reliefs and allowances you’re entitled to.
Here are four ways you can reduce your domestic tax bill.
Pension Contributions
There are three things to think about when you look at your pension situation:
- You get tax relief on pensions up to £3,600 per tax year, even if you don’t earn over the Personal Allowance threshold. So setting up a pension pot for a child becomes a useful tax saving option.
- If you decide to take money out of your pension pot, the first 25% of that amount is normally tax free.
- Tax relief on pension contributions is paid at the highest rate of tax you pay. This means that if you pay the 40% Higher Rate of income tax, you can get 40% tax relief on the money you put into your savings.
Married or civil partnership status
If you’re in a civil partnership or marriage, there are two ways you can use this to make you more tax efficient as a couple.
- Marriage Allowance is payable if one of you is a basic rate taxpayer and the other doesn’t pay any tax at all. It means that £1,260 of the non-taxpaying partner’s personal allowance can be given to their spouse or civil partner.
- You can share out income from assets between you without fiddling the system or incurring a high tax bill. This is known as ‘spouse exemptions’. If you show the asset income as being paid to the partner in the lowest tax bracket, you keep your tax bill as low as possible.
Salary Sacrifice
If you use the salary sacrifice scheme it means that you sacrifice part of your salary for another, non-cash benefit. This could be for things like: childcare vouchers, technology schemes, pension payments, and bike to work schemes. This doesn’t increase the amount you have in your pay packet. But it does reduce your tax bill.
Tax free savings
ISAs continue to be tax free. This tax year, you can save £20,000 on savings in an ISA without paying any tax. And Junior ISAs (JISAs) allow tax free savings of £9,000 this year. With the JISAs, all capital gains, interest or dividends are also tax free.
If you’re 18 – 39 and currently saving to buy a house, it’s worth taking a look at a Lifetime ISA (LISA). You need to be at least a year away from buying. But this means you can save £4,000 tax free and get 25% extra on your savings from the government.
And now for the bad news…
Knowledge is power especially when the news isn’t good. These are the main ways your tax bill might increase at the start of the new tax year. They won’t all apply to you so skim through, take note of the important ones, and plan for the inevitable.
Stamp Duty
The COVID-19 Stamp Duty holiday is over and house prices have risen by nearly 45%. So you’re going to be paying a lot more stamp duty. The average house price in England is now £274,712. In December 2014, this was £191,669.
Capital Gains Tax on property
As those house prices creep up, so do Capital Gains Tax bills on second property sales. The CGT threshold is staying frozen at £12,300 per tax year, so as soon as your total Capital Gains profit goes over that, you’re paying more tax.
Inheritance Tax
House prices have an effect on who pays Inheritance Tax too especially as the residence zero rated threshold stays at £175,000 and the nil-rated IHT band remains at £325,000. More estates will fall into IHT liability because of the continued rise in property prices. The Office for Budget Responsibility (OBR) predicts that freezing IHT will cost taxpayers an additional £445m per year by the 2025-26 tax year. The annual gift allowance has been at £3,000 for over 30 years and doesn’t do much to offset this tax bill.
Council Tax
Central government is allowing local council to increase council tax by a maximum of 3% from the start of the new tax year. In practical maths, this means that a house in Band D will see a rise of £54.94. If that was the only extra drain on our finances, that wouldn’t seem so bad. But as another element to factor into our rising cost of living, its not welcome news.
Dividend Tax
The rate of tax payable on your dividends is rising by 1.25% from April. This applies to self employed people who pay themselves in dividends and everyone who earns more than the annual £2,000 dividend allowance. This rise in dividend tax is set to raise £815m per year by 2025-26, for the Treasury.
VAT
As inflation rises mean increased prices across the board which also means VAT on everything going up.
National Insurance Rise
The government identify this as the new ‘Health and Social Care Levy’. It’s a 1.25 percentage point rise in National Insurance, in practice. It affects everyone who pays National Insurance – employers and employees alike.
Income Tax
The government aren’t raising income tax rates. But they are freezing the income tax thresholds. You have to earn over the £12,570 Personal Allowance to pay any income tax at all. And, despite the fact that it usually incrementally increases each year, the Personal Allowance figure is frozen. As is the 40% Higher Rate income tax threshold, which stays at £50,270. And the 45% Additional Rate threshold, which stays at its 2010 threshold of £150,000.
As employers are pushed into raising salaries due to the increased cost of living, an ever-increasing number of taxpayers will be in higher income tax bands.
Government figures from January show that 1.2 million taxpayers will go into a higher tax bracket and 1.5 million will go over the Personal Allowance amount and start paying income tax. So you might earn a bit more, but you’ll also be paying more tax on that income.
Not a list of good news. But prior preparation can at least prevent any nasty surprises and make you feel more in control of your finances as we start a new tax year.
Tony Shanks