Self Assessment Tax Bill?

Here’s four great ways to save tax. You can often take action to reduce your tax liability for the current year and going forward.

With the deadline for self-assessment looming, tax is at the forefront of many people’s minds. If your tax bill is unexpectedly high, there is usually nothing that can be done for the tax year you are currently reporting for, but you can often take action to reduce your liability going forward.

It could make a big difference to do so. Announcements made by the chancellor in last November’s Autumn Statement have tightened the tax screw. A range of tax allowances remains at current levels for longer. This means wage growth and investment, or property gains put more people into higher tax rates as time goes on. In addition, there were some cuts to tax allowances that affect those taking income or realising profits from their investments. With inflation taking a huge bite out of spending power and tax rises ahead, it is more important than ever to ensure your financial affairs are as tax efficient as possible.

How to Save Tax

There are some simple and effective ways for you to reduce your tax bill, but please note that tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. If you are in any doubt, you should seek professional tax advice.

1. Maximise the Use of Your ISA Allowance

When you invest your money, it’s vital to make use of tax allowances. Individual Savings Accounts - or ISAs - are often a first port of call owing to their simplicity and flexibility. There are several types, notably Cash ISAs and Stocks & Shares ISAs. Any money you makeeither as interest on cash or investment income or gains - is free from tax, which can be really important for your long-term returns.

If you’re over 18 and UK resident, you can pay up to £20,000 into a Stocks and Shares ISA each tax year to invest in shares, funds, investment trusts and more. If your investments go up in value, you won’t have to pay any capital gains tax when you sell. If they generate income, you won’t pay UK income tax either. This could be particularly useful if you’re likely to be impacted by the dividend tax or capital gains tax changes happening in April 2023. Remember unlike cash, investments can fall as well as rise in value, and you could get back less than you put in.

The dividend allowance, the tax-free amount you can earn in share dividends, is to be cut. The allowance, which is on top of the income tax personal allowance, was reduced from £5,000 to £2,000 in 2017. It will now almost disappear altogether, falling to £1,000 in 2023-24 tax year and to £500 in 2024-25.

Meanwhile, Capital Gains Tax (CGT) is paid on the profits from the disposal of assets. There is a CGT annual allowance, presently £12,300 for 2022/2023, on which an individual pays no tax. However, CGT is payable on profits over that - at 10% or 20% depending on your income tax band - plus an additional 8% if the gain is from residential property. From next April the allowance falls to £6,000 and then to just £3,000 from April 2024.

2. Harvest Some Capital Gains

Those with significant capital gains, and therefore potential tax liabilities, could consider taking advantage of this tax year’s higher CGT allowance by selling down investments. You’ll need to do so before the end of the tax year on 5th April, as you can’t carry it forward to next year when the allowance drops to £6,000.

One option for existing shareholdings is a ‘Bed & ISA’ which can help use your CGT and ISA allowances simultaneously. It involves selling holdings and then buying them back in an ISA account. The sale crystallises any capital gain, so selling or partially selling an existing investment could help with tax planning by using some of your capital gains allowance while keeping your holding. Outside of an ISA you are prevented from crystallising gains in this way owing to the ‘30 day rule’.

3. Divide Assets

If you are married or in a civil partnership, it may benefit you to transfer assets to or from your partner. You usually don’t pay capital gains tax on assets you give or sell to your husband, wife or civil partner, though they may have to pay tax on any gain if they later dispose of it.

This could give you the option of taking full advantage of two CGT allowances before they’re reduced in the new tax year. A married couple, for instance, could realise gains of up to £24,600 without paying tax in the current tax year.

You could also divide assets to help maximise two dividend allowances or take advantage of lower income tax bands where one partner’s income is lower. This way there may be less tax to pay on investment income received outside of a tax wrapper.

4. Power Up Pension Contributions

In some circumstances, there are ways to reduce your tax bill through pension contributions and save efficiently for retirement. The downside is that you can’t access the money until retirement age. Whether you are employed or self-employed, contributing to a pension can have the effect of lowering your taxable income as you receive tax relief at your highest marginal rate. For instance, when you pay into a personal pension such as our SIPP, the government adds 20%, representing basic rate tax relief, which is claimed from HMRC by the pension provider. For example, an investor contributes £8,000 into their SIPP and £2,000 is paid in on top, meaning £10,000 ends up in the account.

For higher or additional rate income taxpayers, a further 20% or 25% can be reclaimed. Using the £10,000 example above, an extra £2,000 or £2,500 can be repaid. This means a £10,000 pension contribution can cost as little as £5,500 in net income terms for higher earners.

If you’re a UK resident, under 75, the general rule is you can contribute up to your employed or self-employed earnings each year subject to a maximum of £40,000. However, there is a lower allowance for very high earners or those taking drawdown pension income.

It is also possible to ‘carry forward’ unused allowances from the previous three tax years subject to sufficient earnings in the tax year you make the contributions. This can be particularly useful for the self-employed with lumpy earnings from year to year. Please note benefits depend on circumstances and this area can be complex, so it is worth considering regulated advice.

If you have forgotten to claim higher or additional rate tax relief in previous years, you can make backdated claims for the past four tax years.

How to Claim Higher Rate Tax Relief

For higher earners it is also worth considering how, in some cases, a pension contribution can help reinstate a full income tax personal allowance. Everyone starts with a personal allowance for tax-free income of £12,570, but that starts to be reduced by £1 for every £2 over a threshold of £100,000. Once income is over £125,140, the personal allowance is completely exhausted, but you may be able to get it back by paying into a pension to reduce earnings to below the threshold.

Whether you have a specific question about your finances or looking for someone to help you create a holistic financial plan, we can help you.

Graham Austin, Chartered FCSI Investment Director

Graham.Austin@charles-stanley.co.uk

0207 149 6696

The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. The information in this article is for general information purposes and is not a trading recommendation. Nothing in this article should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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