10 tax saving tips that won’t get you or your adviser in trouble with the taxman
From 1 January 2017, those advisers, lawyers, bankers and accountants who help their clients evade tax will be the subject of new sanctions.
However, for the vast majority of law abiding savers and investors, there are lots of simple, blue chip ways to save tax, without upsetting your tax inspector.
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown:
"The new personal savings and dividend allowances, plus higher ISA allowances, give investors more opportunities to save tax than before, none of which will cause a raised eyebrow from the taxman. The magic of compounding mean the tax savings benefits grow the longer you use them and tax efficient wrappers such as ISA and pension are the stalwarts of sound financial and tax planning.
Those still to feel the pain of filing their tax return by the end of this month should also take the opportunity to look at how the amount of tax paid next year could be reduced. For example, if you paid tax on the interest from your cash savings accounts, shelter them in an ISA as soon as possible."
10 tax saving tips
- Make the most of income tax allowance and tax bands
- Make the most of the new personal savings allowance
- Use your dividend allowance
- Use your ISA allowance
- Use your pensions allowance
- Pension for your spouse
- Use your capital gains tax allowance
- Capital Gains Tax is “better” than income tax
- Save Inheritance tax (IHT) – the new main residence nil rate band
- Invest in Venture Capital Trusts (VCTs) for 30% income tax relief
The increase in personal allowance to £11,000 this tax year and to £11,500 from 6 April 2017 provides greater opportunity for couples to receive tax-free income. If you are married (or in a registered civil partnership) and your spouse pays less tax than you, move income yielding savings into their name to make full use of their personal allowances and basic rate tax bands.
Under the personal savings allowance the first £1,000 of savings income will be tax free for basic rate taxpayers (£500 for higher rate taxpayers, zero for additional rate taxpayers). Interest from bank and building society accounts now pay interest without any tax deducted. However you will be subject to tax on the amount of savings income above the personal savings allowance and savings income also includes interest from corporate bond funds and P2P loans. Therefore arrange your taxable interest bearing savings and investments to make the most of this new allowance. This will include using ISA.
Under the new dividend tax regime the first £5,000 of taxable dividend income will be tax-free, meaning a couple could receive £10,000 dividend income a year with no tax to pay – the equivalent of a £285,000 portfolio yielding around 3.5%.
Above this basic rate taxpayers pay 7.5% tax on dividend income, higher rate and additional rate taxpayers pay a further 32.5% and 38.1% respectively. Married couples should hold income yielding shares and funds in the best proportions to make full use of the dividend allowances and tax bands.
It still makes absolute sense to use your ISA allowance and shelter your savings and investments from tax. There is no income or capital gains tax to worry about on assets held in an ISA, making them one of the most tax efficient ways to save, and you don’t have to record them on your tax return. You can invest up to £15,240 into an ISA this tax year, in any combination of cash and stocks and shares and £20,000 from April 2017.
Investing in a pension for retirement is one of the most tax efficient ways to save, and there is still a large question mark over how long higher rate tax breaks will be available.
Pension contributions currently receive up to 45% tax relief. A £1,000 investment into a SIPP benefits from £250 basic rate tax relief added automatically. Higher rate taxpayers can claim up to a further £250 in tax relief, while 45% rate taxpayers can claim back up to £312.50. You must pay sufficient tax at the higher/additional rate to claim the full tax relief via your tax return.
If you're a UK resident, under age 75 and not drawing from your pension fund, the general rule is you can contribute as much as you earn to pensions per tax year, effectively capped at £40,000.
Investing in pension for a non-earning spouse is one of the most generous of government pension give-aways and a great way to maximise the higher personal allowance. Non-earners can make a £2,880 pension contribution and the government adds £720, even if the individual pays no tax.
At retirement from age 55, 25% of the value of the pension fund can normally be taken as tax-free cash, with the balance being taxable. However if further withdrawals fall within the individual’s personal allowance each year, these will also be tax-free.
Every year you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2016/17) the allowance is £11,100. Using your CGT allowance saves share and fund investors up to 20% capital gains tax.
Bed & ISA is one effective way to use your capital gains tax allowance. By selling your shares or funds and immediately buying them back inside this year’s ISA as a contribution you can harvest gains up to the allowance, and then shelter them from CGT and income tax within the ISA wrapper. This assumes you have made no other gains in this tax year.
Making the most of your capital gains tax allowance in this way could a save a couple up to £4,440 in CGT.
The top rate of income tax is 45% whereas the top rate of capital gains tax (CGT) is now 20% for fund and share investors, and you can make profits of £11,100 a year before you start to pay CGT. Therefore, after making the most of the new £5,000 a year dividend allowance, it makes sense to arrange your portfolio so your other income-producing assets are held in a SIPP or ISA, with your growth assets outside.
April sees a new, additional inheritance tax allowance - the main residence nil rate band. This initially adds an additional £100,000 IHT allowance onto the current nil rate band of £325,000 and reduces the estate tax paid on your home. The main residence nil rate band rises to £175,000 by 2020 meaning a couple could pass £1 million to beneficiaries IHT free by then. However, this will only work if the property is valued at more than £350,000 and less than £2 million (after which the allowance tapers) and is held in joint names.
I need to transfer the ownership of my house, to joint names with my wife to make the most of this new allowance.
Taxpaying, sophisticated investors who are happy taking higher risks in return for the potential for higher rewards could consider VCTs. These invest in some of the most dynamic, entrepreneurial, high growth companies and are long term speculative investments which give you the chance to get in on the ground floor of fledgling investment opportunities. For those who pay sufficient tax, a £10,000 investment in VCT could cost as little as £7,000 after tax relief and generate tax-free dividend income over time.