8 TIPS TO HELP YOU SAVE TAX
Important information – This information isn’t personal advice. Unlike the security offered by cash, the value of all investments and any income they produce can fall as well as rise, so you could get back less than you invest. UK 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 ask for advice. Information correct as at 24 March 2022 and relates to the 2022/2023 tax year.
See whether you could pay less tax by taking advantage of our latest tips
With inflation (the pace at which prices go up) higher than it has been, the cost of living is putting real pressure on household budgets.
This means it’s as important as ever to make sure your money’s working hard for you. One way to do this is to protect yourself from paying more tax than you need to.
Here we look at some simple and effective ways to help shelter your savings from tax right now.
Remember ISA, Lifetime 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, ask for advice. We’re not tax advisers, so if you need help with tax calculations please contact an accountant.
1. Make the most of your ISA allowance
Your money is then sheltered from UK income and capital gains tax. So if your investments go up in value, you won’t have to pay capital gains tax when you sell them. And if your ISA investments make income, you won’t pay UK income tax on that either. This could be particularly useful if you’re likely to be impacted by the upcoming dividend tax hike.
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.
2. 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 can pay in up to £40,000 a year (the current annual allowance), but this can depend on how much you earn or if you’ve already taken money from a pension.
You can get up to 45% tax relief on anything you pay in. For example, if you pay £800 into a pension such as 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).
3. 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 (2022/2023), the allowance is £12,300. Remember, if you realise a gain on anything held in an ISA or SIPP that won’t use your allowance. 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 year’s 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.
4. 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.
To transfer investments between two HL Fund and Share Accounts online, they must be linked. The person gifting stock needs to have access to view the recipient’s account.
5. Consider the Lifetime ISA
A Lifetime ISA (LISA) is a flexible way to save and invest for your first home or later life. You need to be between 18 and 39 years old to open one.
You can contribute up to £4,000 of your ISA allowance each tax year (up until age 50) and like other ISAs, your money is then sheltered from UK income and capital gains tax.
One of the best things about LISAs is the fact that the government will add a further 25% to what you pay in. So for every £4 you save, you get £1 extra – up to £1,000 per tax year.
This money can be withdrawn tax free when making an eligible purchase of your 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.
6. 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 up to the annual allowance (£40,000 for most people), 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.
7. 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.
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.
8. Speak to a financial adviser
You might be happy to do your own tax planning most of the time.
But when it comes to navigating complex areas like inheritance tax, you might find you want some extra help. Spending less on tax means you’ve got more money to put towards your financial goals, and a financial adviser could help you put together a plan.
To learn more about whether financial advice could help you, simply book a call back with our advisory helpdesk. They don’t give personalised advice themselves, but they’ll help you decide if taking advice is right for you and you’re comfortable with the charges involved.
If you’re happy to proceed, they’ll put you in touch with an adviser. We can only advise you on which tax rules apply to you and how you might be able to take advantage. For complicated tax matters, we recommend speaking to an accountant.
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.