HL financial adviser's top 5 tax saving tips
Avoid overpaying tax and explore 5 top tax saving tips that could help you make the most of your money, by keeping more of it in your pocket.
No one can know for sure what tax changes might be announced in the future. It’s one of the reasons you should consider taking advantage of the tax-saving allowances in the current tax year where you can. Here are five top tax tips to consider taking advantage of now.
This article covers tax rates and allowances for the 2022/23 tax year. Remember tax rules can change and their benefits will depend on your individual circumstances. We can advise you on how to make the most of your tax allowances through financial planning, but if you need complex tax calculations we recommend speaking to an accountant. This article isn’t personal advice. If you’re not sure what’s right for you seek advice.
Tip 1 – Make use of your ISA allowances
There’s no UK income tax or capital gains tax on investments held in an ISA. They’re one of the most tax-efficient ways to save. You can invest up to £20,000 into ISAs this tax year, that’s £40,000 per couple.
This is particularly useful if you’re earning an income from dividends.
You won’t pay any tax on the first £2,000 of dividends (the current annual dividend allowance) held outside a tax wrapper like an ISA. But for any amount over, if you’re a basic rate taxpayer, you’ll pay 8.75%. For higher and additional-rate taxpayers, dividend tax jumps to 33.75% and 39.35% respectively.
But because of the tax-free income in ISAs, you could shelter your dividend income from tax.
Keep in mind that with any investments, the value and income they produce can fall as well as rise. You could get back less than you put in.
Tip 2 – consider making pension contributions
Investing in a pension for retirement is another of the most tax efficient ways to save.
If you’re a UK resident under age 75 the general rule is you can contribute as much as you earn to pensions this tax year and receive tax relief. There’s also an annual allowance, which is £40,000 for most people. The annual allowance can be lower for higher earners and some people who’ve drawn money from their pension.
Saving into a pension can also help you to avoid a potential 60% tax trap. If your total income is £100,000 or more, your tax-free personal allowance (£12,570) is reduced by £1 for every £2 over the threshold.
What’s more is the personal allowance disappears entirely if you’re earning £125,140 or more.
By making the most of pension contributions you can reduce your taxable income, effectively reinstating some or all of your personal allowance if you bring it below £125,140.
Those with “adjusted income” of £240,000 or more could see their pension contribution allowance tapered. So making the most of other tax wrappers, like ISAs, can help when it comes to your savings.
Remember, money in a pension cannot normally be accessed until age 55 (57 from 2028).
Tip 3 – Use any available carry forward for pensions
If you have unused annual pension allowance from the past three tax years, you might be able to use it this year. Carry forward can effectively increase this year’s allowance. Any personal contributions are still capped by your earnings.
This year, the annual pension allowance is £40,000. If you haven’t added money into a workplace or personal pension over the last three years you could make up to a £160,000 contribution this tax year. You could even get up to a 45% tax relief boost from the government. It’s 46% for Scottish taxpayers.
Keep in mind that, even if you’ve started to take money out of your pension, you can still contribute. However, your annual allowance might be reduced to £4,000. This is called the Money Purchase Annual Allowance.
Tip 4 – Pay into a pension for your partner
Investing into a pension for a non-earning partner is one of the more generous pension giveaways.
Non-earners under 75 that are UK residents can make a pension contribution of up to £2,880 and the government will add up to £720 in basic rate tax relief.
From age 55 (57 in 2028), up to 25% of the value of the pension fund can normally be taken as tax-free cash, with the remaining balance being taxable.
However, if further withdrawals fall within the individual’s personal allowance each year, these will also be tax free.
Tip 5 – Transfer assets to your spouse or civil partner
As the saying goes, a problem shared is a problem halved. That can apply to tax, too.
If your spouse pays less tax than you, or no tax at all, then you could be losing out on valuable allowances each year.
This includes the personal allowance, personal savings allowance, dividend allowance and capital gains tax allowance that aren’t being fully used.
You can transfer assets to a spouse free of capital gains tax. Keep in mind if they decide to sell it, they might have to pay capital gains tax on it. However, they’ll still be able to use their allowance of £12,300 if they haven’t already used it.
If your spouse isn’t earning an income and you’re a basic rate taxpayer, they can transfer £1,260 of their personal allowance over to you, helping reduce your tax liability by up to £252 in the current tax year.
Need more help with saving tax?
If you’d like an expert on financial planning to help you to make the most of your tax allowances, you’re in the right place. My colleagues and I are dedicated to helping clients achieve peace of mind from having a sound financial plan in place.
It starts with a call with our advisory helpdesk. If it looks like taking advice is right for you, we’ll book your free initial consultation with me or one of our other financial advisers. We’ll discuss your options with no pressure to take advice and no charge. If, having heard what advice can offer, you decide to go ahead there will be a charge.