With the end of the tax year approaching, it’s a good time to check to make sure you’re taking full advantage of your tax-friendly benefits.
Tax years run from April 6 one year to April 5 the following year, and if you don’t use the various tax-free allowances, they are lost forever in most cases.
This is especially important for higher income earners who face official tax rates of 40 and 45 percent, but pay marginal rates of 60 percent in some cases.
But what should they do before the calendar rolls over to a new tax year on April 6? We asked a selection of financial experts what they would recommend for high incomes.
Year-end closing: The end of the fiscal year offers a good opportunity to make sure you don’t miss out on any tax-saving measures
Use your Isa allowance
An Isa is one of the best ways from financial experts to avoid swallowing up taxes on your returns.
ISAs are often the first point of contact for investors and savers seeking tax savings due to the product range and flexibility that make them suitable for a variety of savings and investment needs.
By using as much of your full Isa credit as possible each year (£20,000 in the current 2022/23 tax year), it is possible to build up a large pot of tax-free money.
After the end of the tax year, your Isa allowance for that year will lapse. It’s a use it or lose it situation.
Gains on the sale of stocks and shares within an ISA are exempt from capital gains tax, as are any dividends.
For savers, the interest is tax-free.
> View the best cash Isa rates in our tables
> Read our guide to the best stocks and stocks Isas
An Isa is particularly important, as capital gains and dividend payout limits will be slashed from the start of the 2023 tax year – meaning you may be at risk of losing more of your money.
ISAs are portable and can be transferred between different types and providers without losing their tax-exempt status.
Chief investment analyst at Charles Stanley, Rob Morgan, says: “Also remember that Isa investments don’t have to be declared on a tax return, so they can also be very helpful in simplifying your finances, especially if you’re likely to be impacted by the changes in the dividend tax or capital gains tax that take place in April 2023.”
> Read our essential guide to Isas
Need to make some capital gains?
The tax-free capital gains tax will be reduced from the current limit of £12,300 to £6,000 in April, following the Chancellor’s autumn statement in November, and will be reduced again to £3,000 from April 2024.
The tax is levied on investment profits – unless they fall within a fiscally favorable package, such as an Isa or pension.
Partner at financial planning firm Saltus, Jordan Gillies, says: ‘If you have unrealized capital gains, sell up to your annual allowance of £12,300. Do this the right way and you should be able to reduce your tax liability every year.”
> Do you now have to sell some investments? Why a Bed & Isa pays off
Pensions: It may seem obvious, but enjoying your pension to the fullest is an efficient way to avoid the tax authorities
Can you increase your pension premium?
Pensions are the tax-advantaged way to save for retirement, whether through workplace or personal arrangements.
High earners with the ability to save more can make good use of retirement benefits to maximize tax-friendly investing, but should remember that they can’t get to the money until age 55.
Fiscal pension on premiums increases the amount that goes into effect. In fact, this means that you invest in your pension from untaxed income.
Everyone automatically receives a 20 percent tax reduction in the basic rate; Higher rate and additional taxpayers must claim the remainder of their 40 percent and 45 percent deductions themselves.
If you are still working, your employer will make valuable contributions on top of what you put into it.
Additionally, if your contributions are paid through wage sacrifice, your retirement contributions are paid before income tax and national insurance.
In the Spring Budget, Chancellor Jeremy Hunt increased the annual allowance for pensions from the next tax year to £60,000. The lowest level of the declining annual allowance for high earners, who are starting to see their allowance fall above the adjusted income of £260,000, will be raised from £4,000 to £10,000.
Hunt also removed the cap on lifetime pension benefits, which stood at just over £1.07 million, but these changes don’t come into effect until April 6.
However, there are some retirement moves you can make now if you can afford it. You can use up this year’s £40,000 annual allowance and you can also look back over the last three tax years to make up any unused allowance.
However, there are nuances within the rules, so if you have a lot to contribute, you should ask a professional wealth planner or financial advisor.
Are you caught out by the 60 percent tax trap?
Pension contributions are also a good way to avoid the 60 per cent tax trap if you earn more than £100,000.
For every £2 earned above the £100,000 threshold, £1 of Personal Allowance is lost. If you earn € 125,140, you will lose your personal allowance in full.
By paying pension contributions, you can reduce your taxable income and possibly reclaim your personal allowance, Gillis adds.
Do you need to think about inheritance tax?
Giving money to others during your lifetime is the simplest way to reduce the size of your estate and thus the tax that will be payable on it when you die.
Inheritance tax is currently payable at a rate of 40 per cent on estates valued above the zero rate bracket of £325,000.
But an additional fee, the zero-rate residency band raises the threshold by £175,000 if you leave your home to direct descendants.
That means the IHT threshold might be a joint £1 million, if you have a partner and own a property.
Beware, though, as once an estate reaches £2 million, this homeowner’s allowance is deducted by £1 for every £2 above this threshold. It disappears completely at £2.3 million.
The best way to avoid inheritance tax is to spend or give away your money well in advance.
There are some annual gifts that are automatically exempt from inheritance tax, including up to £3,000 a year, which can be given to one person or split between a number of people, plus you can give £250 a year to as many people as you like, says Morgan .
You can give unlimited amounts to other people if you want, but they will fall under the so-called seven-year rule.
Officially, these are called “potentially exempt transfer gifts,” because if you survive seven years, the money is automatically exempt from inheritance tax.
If you die before the seven years are up, inheritance tax is levied on a sliding scale — starting at the full 40 percent hit if it’s within the first three years.
> Read more: How to avoid estate taxes legally
IHT: Once you hit the threshold, 40% of your estate could be lost to tax, so it pays to use your tax-free rights
Are you making the most of other tax benefits?
In the midst of pensions and ISAs, it can be easy to forget about the tax savings you can reap on charitable donations and work expenses.
If you’re a UK taxpayer, you can claim back the difference between the base rate of tax (20 per cent) and the rate you pay on your donations, says David Gibb, financial adviser at Quilter.
He says: ‘For example, if you donate £100 to charity, they will recover £25 from HM Revenue and Customs, making your donation worth £125 to the charity. You can claim tax relief on your donation through your self-assessment declaration or by contacting HM Revenue and Customs.’
And if you are self-employed or have work-related expenses, you may be entitled to this.
‘How much tax relief you can claim depends on the type of expense and your personal circumstances. So it’s worth talking to a tax expert to find out what you’re entitled to.’
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