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Budget tax allowance freezes – here's how to cut your tax bill

The tax allowance freezes from the Budget could mean we'll end up paying more tax in the future. Here are four tax saving tips to help.

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.

On 3 March, the chancellor announced plans to freeze a number of tax allowances. Both the personal allowance (the amount you can earn tax free) and the higher-rate threshold (when you start to pay higher rates of tax) will increase slightly from 6 April 2021 as planned, then freeze until April 2026. The capital gains tax exempt allowance (which is the gain you can realise each year before getting taxed) will also freeze – it will stay the same as it is now until April 2026.

While the freezes could result in the average person paying more tax than they do now, every tax year it's worth taking steps so you don't pay more tax than you need to.

We hope you find the following tips helpful, but they aren't personal advice. If you're not sure what's right for your situation, please seek advice. Pension and tax rules can change and benefits depend on your circumstances. Different tax rates and bands apply for Scottish taxpayers.

Make use of your pension and ISA allowances

Pension allowance

Saving into a pension can be a great way to save towards your retirement. Each tax year (6 April-5 April) you're entitled to tax relief on your contributions. For anything you pay in, the government will automatically add 20% on top.

If you pay tax at a higher rate, you could claim back up to a further 25% (or 26% for Scottish taxpayers) in tax relief through your tax return.

To receive tax relief on your pension contributions you can't pay in more than you earn, up to the limit of £40,000 (for most people). If you earn £3,600 or less, you can pay in up to £2,880 and still benefit from the 20% tax relief boost – even as a non-earner.

PENSION TAX RELIEF CALCULATOR

If you have an existing HL SIPP, you can check how much you've paid in so far this tax year by logging into your SIPP account online. Select the 'Transaction History' tab, then 'View all contributions'. You can then pick the tax year and look at the contributions you've made in that year.

Don't already have an HL SIPP?

If you'd like to benefit from more control and make the most of your pension allowances, you could think about opening one before the end of the tax year (5 April).

Remember money in a pension can't normally be taken out until 55 (57 from 2028), when up to 25% is usually tax free with the rest taxable.

MORE ON THE HL SIPP

ISA allowance

Through ISAs you have the chance to squirrel away up to £20,000 this tax year.

If you can afford to, making the most of your ISA allowance could help you build a sizable pot, free from UK income and capital gains tax. This could cut your tax bill and, because you don't have to declare ISAs on your self-assessment, it could also make your tax return less of a headache.

If you have an HL Stocks and Shares ISA or HL Lifetime ISA, you can check how much of your allowance you've used up with us so far this tax year online. Simply log in and select your ISA account. Then choose the 'Transaction History' tab, or 'Cash subscriptions' if you're using the HL app.

Remember, all investments rise and fall in value so you could get back less than you invest.

MORE ON THE HL STOCKs AND SHARES ISA

Get ahead of the 5 April deadline

The end of the tax year (5 April) falls on a bank holiday this year, meaning your bank might not be open. If they need you to authorise a debit payment and they're closed, you could miss your chance to secure your pension or ISA allowances.

Although it's unlikely there will be any problems, topping up your account(s) sooner rather than later gives you plenty of time to deal with any minor hiccups.

Our team will be here to answer your questions right up until 11.59pm on 5 April.

Make the most of salary sacrifice

In some cases, the government will let you give up a portion of your salary and spend it on certain things free of tax. This includes pension contributions to a workplace pension, childcare vouchers, bike-to-work schemes, and even work phones.

Giving up a portion of your pay every month might not sound appealing, but it can make financial sense as you can actually save money. The part of the salary that you give up isn't usually subject to tax. And the amount you get paid is reduced, which also decreases the amount of National Insurance you have to pay.

While it might be slightly too late this tax year, it's worth speaking to your employer about any tax saving opportunities for the start of the next tax year.

Make use of your partner's tax allowances and vice versa

If you're married or in a civil partnership, you could make the most of the marriage allowance. If one spouse is a non-taxpayer, and the other is a basic rate taxpayer, the non-taxpayer can give £1,250 of their personal allowance to their spouse in the current tax year.

This means the basic rate taxpayer could earn £13,750 before they have to start paying tax, rather than £12,500.

You can also save in other ways if you're married or civil partners. You're treated as separate individuals when it comes to capital gains tax (CGT). Each person has their own CGT allowance (£12,300), and transfers between spouses and civil partners are exempt from CGT.

This means couples can have a combined CGT allowance of £24,600 and share assets between them without triggering a capital gains tax bill. To help cut your tax bill even more, the assets can be held by or transferred to the spouse paying the lower rate of tax.

HOW TO CLAIM MARRIAGE ALLOWANCE

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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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