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Could we help you reduce your tax bill?

How we can help to potentially reduce tax bills

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Most investors know that using ISA and pension allowances can be a great way to save tax.

But, as finances become more complex, so do tax-saving strategies. And that’s where a good financial adviser can be worth their weight in gold.

Everyone’s circumstances are unique, and the more complicated, the more important advice becomes. Seeking advice from a professional could be the answer. An adviser will review all of your own personal circumstances and recommend ways to improve your financial well-being.

Please remember that tax rules change and their benefits depend on individual circumstances.

A couple of years ago we saved Miss H nearly £30,000 in tax for a cost of just £625 for advice over the telephone.

Chartered financial adviser Bradley Clark stopped his client paying an effective rate of 60% on some of her income, reclaimed her personal allowance which she had lost completely and got her 40% tax relief too.

Bradley recommended a £62,500 (gross) pension contribution, and this saved Miss H almost £30,000 in tax in three ways:

1. Basic-rate tax relief

By contributing £50,000 into her pension, the government automatically topped it up by 20% or £12,500 to make £62,500. Please note that this contribution was over the current annual allowance which is £40,000 for most people. This was possible by using carry forward. Before contributing please check your own contribution limits.

2. Higher-rate tax relief

Because Miss H was a 40% tax payer she gets another 20% tax relief on her pension contributions that she can claim through her tax return.

So here she saved another £12,500 on her tax bill.

3. Reclaiming her personal allowance

Most people have a personal allowance, for the 2018/19 tax year (when Mrs H received this advice) it was £11,850. Any income within this isn’t subject to income tax. But anyone with income of more than £100,000 starts to lose their personal allowance, at a rate of £1 for every £2 over £100,000 of income.

This is often referred to as a 60% tax trap because for every £2 of income over £100,000 you pay higher-rate income tax of 40% and also lose £1 of your personal allowance (until it is fully lost, which in the 2020/21 tax year is when your income exceeds £125,000), meaning an extra £1 is taxed at 40%.

So the tax you pay for each £2 of income in that band is £1.20, an effective rate of 60%.

A personal pension contribution reduces your income for the purpose of working out your entitlement to a personal allowance.

Before the pension contribution Bradley’s client had completely lost her personal allowance. But after the contribution her income for this purpose was £76,500, reduced from £139,000.

As this was less than £100,000 she regained her full personal allowance, and so £11,850 of her income which was being taxed at 40% was no longer taxed, which saved her £4,740.

Total saving

The pension contribution has saved Miss H tax of £29,740 (£12,500 basic-rate tax relief, £12,500 higher-rate tax relief and £4,740 tax no longer due after reclaiming her personal allowance).

Or in other words Miss H has £62,500 extra in her pension, which only cost her £32,760.

Please note that Miss H will only be able to access the money in her pension from age 55 (57 from 2028).

How much could you save?

Of course, not everyone can save that much, and it’s tough to put a precise figure on how much your tax bill could fall as everybody’s circumstances are different.

Now could be the right time to review your portfolio to ensure it’s as tax-efficient as it can be, by using some of the most astute tax planning ideas.

A good place to start is to book in a call with our advisory helpdesk about our advice service and what they could do for you.

Book your call back

We’ll only recommend you meet a Hargreaves Lansdown financial adviser if it’s right for you. If not, we can offer further information to help you make decisions for yourself – it’s your call.

If you’d like to talk to us about your financial plans book your call back today. Or to get started right away, give us a call on 0117 317 1690.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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