Minimise your tax bill with 10 tax saving tips
With many expecting inflation to rise this year, it wouldn’t be a bad idea to think about how you can make your money go further at the final hurdle – the taxman.
Check out these 10 tax saving tips below, courtesy of financial provider Hargreaves Lansdown.
And remember, if you’re self-employed, you’ve only got until the end of January to submit your self-assessment tax return.
1. Forget the wedding band – tax bands are where it’s at
This tax year, your personal allowance – which is the amount of income you can earn before you have to pay tax – is set at £11,000. From April 2017, this will go up by another £500.
But if you’ve exchanged vows with a loved one , the ‘Marriage Allowance’ lets you transfer £1,100 of your personal allowance to your husband, wife or civil partner - if they earn more than you.
This reduces their tax by up to £220 in the tax year (6 April to 5 April the next year).
To benefit as a couple, you (as the lower earner) must have an income of £11,000 or less.
If you were eligible for Marriage Allowance in the 2015 to 2016 tax year, you can backdate your claim to 6 April 2015 and reduce the tax paid by up to £432.
Just apply via Gov.uk.
2. Make sure you’re aware of the new personal savings allowance
The first £1,000 of your savings income is tax free if you’re a basic rate taxpayer. This includes any interest accrued from corporate bond funds and peer-to-peer (P2P) loans. So ensure that you make use of this.
Higher rate tax payers get £500 worth of savings interest tax-free, although additional rate tax-payers don’t get anything.
3. Divvy up your dividends
The first £5,000 of taxable dividend income is free – this means that if there are two of you, you can enjoy £10,000 per year without having to pay tax. Above this, you’ll be looking at 7.5%, 32.5% and 38.1% depending on your taxpayer rate. Transfer dividend-paying assets to a partner as a gift if necessary.
4. Your Isa is nicer
Just like cornflakes, sometimes the original is best. This tax year you can put £15,240 into an Isa (individual savings account). From April, this goes up to £20,000 – all tax-free.
An Isa should always be your first stop when deciding what to do with cash and stocks and shares investments.
5. Use your pension allowance
Not only is a pension still an enormously tax-efficient way to save for your future, but changes to the higher rate tax breaks may well be on the cards some time in the future.
Currently, you get tax relief on pension contributions of up to 100% of your earnings or up to £40,000 worth of contributions per year – whichever is lower.
6. Ensure your spouse has a pension, too
If you’ve a loved one, even if they don’t earn, they should have a pension too. The reason for this is that the government will sling up to £720 their way in the form of tax relief on the first £2,880 contribution they make per year.
7. Capital gains have an allowance too
This tax year, you can earn up to £11,100 in capital gains without paying the Capital Gains Tax (CGT) on it.
You can also think about executing a ‘Bed & Isa’ (or ‘Bed & SIPP’). This is a process where you sell your shares or funds and then buy them back, but inside inside an Isa or SIPP. In doing this, any gains you make will be protected within the wrapper.
8. It’s better to make gains than income
Whereas the top rate of income tax is 45%, the top rate of CGT is 20%, with, as stated earlier, an allowance of £11,100.
It’s also worth bearing in mind the £5,000 tax free dividend allowance as covered in point 3.
So ensure income-producing assets are in a tax wrapper and growth assets are without.
9. Remember the new main residence nil rate band
From April, the current nil-rate inheritance tax (IHT) band will rise from £325,000 to £425,000. It will then increase each year by a further £25,000 until the tax year 2020/21 when it will reach £175,000 extra. From then, it will increase with the rate of inflation.
In theory, this means a couple could pass on £1,000,000 free of inheritance tax.
To make the most of this allowance, however, ownership of the residence must be in joint names.
10. Like a bit of risk? You could be set for 30% income tax relief
By dipping your toe into the world of venture capital trusts (VCTs) – where you invest in start-up or smaller company – you could put in at least £10,000 at a cost of £7,000 due to the 30% tax relief offered VCT investors. However, to get this tax relief you must hold these shares for at least five years.
A further advantage is that any dividends from ordinary shares in VCTs aren’t liable for income tax.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Venture Capital Trusts were introduced in 1995 to encourage private investments in the small-company sector by offering tax relief in return for a minimum investment commitment of five years. A VCT is a company, run by a fund manager, which invests in other companies with assets of no more than £7m that are unlisted (not quoted on a recognised stock exchange) but may be listed on the Alternative Investment Market (AIM) or plus with the aim of growing the companies and selling them or launching them on the stock market. Investors in new VCTs are offered desirable tax advantages and VCTs themselves are listed on the London Stock Exchange, with strict limits laid down by HM Revenue and Customs on what they can invest in and how much they can invest.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.