Last Updated: 27 October 2023
Could you pay less tax?
No one wants to pay more tax than they need to. Especially when you’re close to retiring and you want to make sure your money is going to do the work it needs to.
Take a look at our 8 tips on how to save tax.
This isn’t personal advice. Pension, ISA and 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 18 October 2023.
1. Make the most of your ISA allowance
The ISA allowance is one of the most generous tax breaks offered by the UK government. You can pay up to £20,000 into a Stocks and Shares ISA each tax year.
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 generate income, you won’t pay UK income tax on that either.
You could make the most of your ISA allowance even if you don’t have any spare cash. It’s possible to use shares from your HL Fund and Share Account to top up an existing Stocks and Shares ISA.
You can’t usually move shares directly into an ISA due to HMRC rules. But as part of our online share exchange service you can sell shares, move the cash to a Stocks and Shares ISA, and buy back the same shares in your ISA by giving one instruction.
For funds you’ll need to sell them and move the money across before buying them back.
By selling you could have a capital gains tax liability, which we’ll cover later.
Find out more about Share Exchange
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.
Find out more about Stocks and Shares ISAs
Investing is typically for longer periods of time, usually 5 years or longer.
If you don’t want to invest your money, or don’t wish to tie it up for so long, you can make the most of your ISA allowance with a Cash ISA. All interest earned in a Cash ISA is free from UK income tax.
It’s worth noting that inflation reduces the future spending power of money.
2. Watch out for capital gains tax
Every year, you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2023/2024), the allowance is £6,000.
From April 2024, the CGT allowance will drop from £6,000 to £3,000.
This reminds us of the value of ISAs and pensions. Remember, if you realise a gain on anything held in an ISA or pension, that won’t use your allowance. Outside of an ISA or pension, 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%.
Higher CGT rates apply to residential property. The amount of CGT paid by Scottish taxpayers is based on UK income tax bands.
3. 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 £60,000 a year (the current annual allowance), but this can be lower if you’re a higher earner 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 tax payers 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).
You can also use our online share exchange service to use shares from your HL Fund and Share Account to top up an existing SIPP and get tax relief.
Find out more about Share Exchange
Try our pension relief calculator
You could even consider paying money in a pension for a non-earning spouse or child. It’s one of the lesser-known tax giveaways.
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 (£60,000 for most people), and they’ll benefit from tax relief. This won’t affect how much you can pay into your own pension.
Find out how much you can pay into a pension
4. Consider how you take money from your pension
If you’re considering taking money from a pension, it’s worth thinking about how this will be taxed.
When you take money from a pension, up to 25% will be paid tax free with the rest taxable at your marginal rate of income tax.
With this in mind, you may wish to consider how you do this. As if you take too much at one time, you could pay more tax than you need to.
If you’re still working, you may wish to take money from other sources like ISAs where withdrawals are tax free.
And as you stop working you may find you’re in a lower tax band where you may pay less tax. It’s always worth looking at the tax year you aim to do this in as you may have more allowances available to you.
You also don’t have to move your entire pension into drawdown or buy an annuity all at once. You can choose to do this in stages, moving a portion of your pension value each time.
When moving into drawdown a portion at a time, this is known as phased drawdown.
Each time you move a part of your fund into drawdown you can usually take up to 25% tax free. You can then draw a flexible income from the rest at any point which is taxable. You choose how much income to take, if any, and can start, stop or vary the amount you withdraw.
By doing this you can just take the tax-free cash if you want to, leaving the rest in the pension.
The rest of the fund stays invested as you choose. Income is not secure and could fall if you take too much out, your investments don’t perform as you hope or you live longer than expected.
Buying an annuity, where you get a secure income for life, doesn't have to be an all or nothing approach either.
You can buy one before or after going into drawdown.
Each time you purchase an annuity you can get up to 25% tax free cash if you have not already done so by going into drawdown.
You could decide to swap small portions of your pension for multiple annuities over time. This approach allows you to gradually de-risk your pension income throughout your later life, which could help to give you peace of mind during uncertain times. You also could get better rates as you age, particularly if you develop health conditions.
What you do with your pension is an important decision that you might not be able to change. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help you and we can offer you advice if you’d like it.
Discover HL's retirement options
5. 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.
This gives you the option of dividing your assets in order to take full advantage of your CGT allowances before they’re reduced in the new tax year. Between a married couple, for example, you could realise gains of up to £12,000 this tax year 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. And if you separate the rules can be more complex.
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.
How to transfer investments to a linked account
6. Passing on wealth to the next generation
Many of us want to leave a legacy or secure our family’s financial future.
The main aim of investing for a child is usually to provide a nest egg to help them out financially in later life. However, there are additional benefits that could see the amount of tax needing to be paid both now and in future reduce significantly.
The simplest way to minimise tax is to use a tax-efficient account such as a Junior ISA or a child’s pension such as the Junior SIPP. Both accounts also avoid additional tax liabilities for the parents.
You can gift money throughout your lifetime into children’s accounts, either with ad-hoc lump sums or via a monthly Direct Debit. But it’s worth remembering that once gifted, you can’t take it back.
As with all things tax, the rules are likely to change over time. The benefits will depend on the individual circumstances of the child and the person paying into the child’s account. Children can access a Junior ISA when they turn 18. A Junior SIPP isn’t usually accessible until age 55 (which will rise before the child reaches retirement).
Learn more about investing for children
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 |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
To make the most of this allowance, you’ll want to make sure that you’re earning a good rate on your cash.
The HL 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.
Inflation reduces the future spending power of cash.
Learn more about Active Savings
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, or retirement, 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, 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.
This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). 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. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).
