HL financial adviser's top 5 tax saving tips

No one can know for sure what tax changes might be announced in the future. Tax rules can change at any time, so tax cuts now could mean tax hikes later.

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 2023/24 tax year. Remember tax charges and their benefits can change and 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 becomes especially advantageous for individuals earning income from dividends. Outside of an ISA, the first £1,000 of dividends is tax-free, although this is reducing to £500 from 6 April 2024. Beyond this threshold, tax rates vary based on your taxpayer status: 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. Scottish taxpayers should use the rest of UK tax bands to determine the rate of tax they’ll pay on dividends.

However, the tax-free status of ISAs presents an opportunity to shield dividend income from taxation, offering potential tax savings.

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.

Find out more about the HL Stocks and Shares ISA

Tip 2 – Consider making pension contributions

Investing in a pension for your retirement is one of the most tax-efficient strategies available. Here's how it works: If you're a UK resident under the age of 75, you generally have the flexibility to contribute up to the amount you earn to your pension during this tax year while receiving tax relief on those contributions. For most individuals, there's an annual allowance set at £60,000, although this amount may be lower for higher earners or those who have previously withdrawn funds from their pension.

Contributing to a pension not only helps you save for the future but can also prevent you from falling into a potential tax trap. If your total income exceeds £100,000, your tax-free personal allowance of £12,570 decreases by £1 for every £2 over this threshold. For individuals earning £125,140 or more, this personal allowance is completely phased out.

By maximizing your pension contributions, you can effectively lower your taxable income, potentially reinstating some or all of your personal allowance if you bring it below £125,140. However, it's important to note that those with an "adjusted income" of £260,000 or more may see their pension contribution allowance gradually reduced. In such cases, using other tax-efficient savings vehicles like ISAs can complement your overall savings strategy.

The removal of the lifetime allowance in the 2023 Spring Budget has addressed concerns for individuals worried about exceeding this limit, making pension contributions more appealing again.

Keep in mind that funds in a pension are typically inaccessible until reaching the age of 55 (scheduled to increase to 57 by 2028).

Find out more about the HL SIPP

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 £60,000. If you haven’t added money into a workplace or personal pension over the last three years you could make up to a £180,000 contribution this tax year. You could even get up to a 45% tax relief boost from the government. It’s up to 47% 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 £10,000. This is called the Money Purchase Annual Allowance.

Find out more about carry forward

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.

Find out more about the HL SIPP

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 £6,000 if they haven’t already used it.

It's worth mentioning that starting from 6 April 2024, the dividend allowance decreases to £500 per person, and the capital gains tax allowance decreases to £3,000.

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.

For all our tax saving tips, download our guide to saving tax

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.