7 TIPS TO HELP YOU SAVE TAX
Important information – This information is not personal advice. Unlike the security offered by cash, the value of all investments and any income they produce can rise as well as fall, so you could get back less than you invest. Tax rules can change and the benefits will depend on your individual circumstances. Money in a pension is not usually accessible until at least age 55 (57 from 2028). If you’re not sure whether an investment is right for your circumstances, please seek personal advice. Information correct as at 6 April 2021 and relates to the 2021/2022 tax year.
Find out how to make the most of tax shelters such as ISAs and pensions, plus tips on using your capital gains tax allowance and other ways to help reduce your tax bill
The Institute for Fiscal Studies (IFS) has warned that tax rises of more than £40bn a year are 'all but inevitable'. High levels of government borrowing in the wake of the coronavirus pandemic could mean big tax rises into the middle of the next decade, according to the think tank.
No one can be sure if or when taxes will rise. But if you’re looking for simple and effective ways to shelter your investments from tax right now, here are some options. Remember ISA, pension and tax rules can change and benefits depend on your circumstances.
This isn't personal advice. Our accounts are intended for people who are happy to make their own decisions. If you’re unsure whether a course of action or an investment is right for you, seek advice. We’re not tax advisers, so if you need help with tax calculations please contact an accountant.
Make the most of the ISA allowance
The ISA allowance is one of the most generous tax breaks offered by the UK government.
If you’re over 18 and UK resident, you can pay up to £20,000 into a Stocks and Shares ISA each tax year. Your money is then sheltered from UK income and capital gains tax. And while investing in the HL Stocks and Shares ISA should be for the long term, you can take your money out if you need to. Remember unlike the security offered by cash, all investments can fall as well as rise in value, so you could get back less than you put in.
This tax year ends on 5 April, so if you want to make use of your ISA allowance and it’s right for you, you should act soon.
Think about paying money into a pension
Adding money to a pension can be one of the most tax-efficient ways to save for retirement.
If you’re a UK resident, under 75, the general rule is you can contribute as much as you earn to pensions each tax year and receive tax relief. Most people will pay a tax charge on any contributions over £40,000 a year (the current annual allowance).
You can get up to 45% tax relief on anything you pay in. For example, if you pay £800 (gross) into a Self-Invested Personal Pension (SIPP), you’ll get 20% (£200) automatically added as basic-rate tax relief making a total contribution of £1,000. Higher-rate taxpayers can claim up to a further £200 (20%) in tax relief via their tax return, while 45% rate taxpayers can claim back up to £250 (25%) on top.
You must pay enough tax at the higher - or additional - rate to claim the full tax relief on your tax return. Different rates and tax bands apply for Scottish taxpayers.
Money in a pension can’t normally be accessed until age 55 (rising to 57 from 2028).
Don’t forget about capital gains tax
Every year, you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2021/2022), the allowance is £12,300. If any gain above the allowance falls within the basic-rate tax band, there’s normally 10% tax to pay. Any part of the gain which falls into the higher - or additional - rate bands is normally taxed at 20%.
So, for example, assuming you’re a higher - or additional - rate taxpayer with no allowable losses, if you have gains of £24,600 from your investments and decide to sell in one go, you’ll pay £2,460 in capital gains tax (£24,600 minus £12,300, taxed at 20%).
But if you sold to spread the gains over two tax years (realising gains of £12,300 each year), you’d pay no tax if the CGT allowance remains as it is.
Higher CGT rates apply to residential property. The amount of CGT paid by Scottish taxpayers is based on UK income tax bands.
If you want to take advantage of this allowance, you’ll need to do so before the end of the tax year on 5 April, as you can’t carry it forward to next year. Tax rules can change and the benefits depend on your circumstances.
Divide your assets
If you’re married or in a civil partnership, it’s worth being aware of the special rules around the gifting of assets.
You don’t pay capital gains tax on assets you give or sell to your husband, wife or civil partner, unless:
- You separated and did not live together at all in that tax year
- You gave them goods for their business to sell on
This gives you the option of dividing your assets in order to take full advantage of your CGT allowances. Between a married couple, for example, you could realise gains of up to £24,600 without paying capital gains tax.
Your spouse or civil partner may have to pay tax on any gain if they later dispose of the asset. Their gain will be calculated on the difference in value between when you first owned the asset and when they dispose of it.
You could also benefit if you’re in different tax brackets. For example, if your spouse is in a lower tax band than you, they may pay less tax on investment income received outside of a tax wrapper.
Remember that once an asset is gifted, you can’t normally take it back.
Consider the Lifetime ISA
In most cases, pensions are one of the best ways to save for retirement. You can get generous tax relief and contributions from your employer.
But if you’re looking for additional tax-efficient ways to save and you’re aged between 18 and 39, you could consider opening a Lifetime ISA. A LISA can also be used towards the purchase of your first home.
You can contribute up to £4,000 of your ISA allowance each tax year (up until age 50) and get a 25% bonus from the government. This money can be withdrawn tax free when purchasing an eligible first home or after age 60. Other withdrawals will usually mean a 25% government charge, so you could get back less than you put in.
You’ll need to keep the LISA open for 12 months before using it to buy a first home.
Could you pay into a pension for a spouse or child?
Investing in a pension for a non-earning spouse or child is a lesser-known giveaway.
You can add up to £2,880 to a loved one’s pension and the government will add up to £720 in tax relief (assuming the individual is under 75), even if the individual doesn’t earn anything. If they earn more than £3,600 you can pay in as much as they earn and they’ll benefit from tax relief. They’ll usually be able to access the money from age 55 (57 from 2028). This won’t affect how much you can pay into your own pension.
Make the most of your personal savings allowance
You can currently earn up to £1,000 in savings interest before any tax is due; this is known as your personal savings allowance (PSA). The amount you can earn tax free depends on your tax position (the PSA for Scottish taxpayers is based on UK income tax bands):
|Income Tax band||Tax-free savings interest|
To make the most of this allowance, you’ll want to make sure that you’re earning a good rate on your cash. But with savings rates remaining stubbornly low, many savers are potentially missing out.
Our Active Savings service aims to help you get a better rate on your cash, by letting you pick and mix easy access and fixed term savings from a range of different banks and building societies – all through the convenience of one online account.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.