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With the UK cost of living rising in 2022, many people are understandably looking for more ways to increase their wealth and disposable income. Cutting monthly luxury expenses is not the only option, however. It may be that optimising your tax plan could also put more hard-earned money back into your pocket. Below, our Midlands-based financial planners at Wealth solutions offer a short guide on tax-saving ideas in the 2022-23 tax year. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 0121 446 5815
E: [email protected]
Every tax year (April-April), a UK resident is eligible to a range of tax allowances that “refresh” each year, and can help improve your “real returns”. Three, in particular, are noteworthy:
- Capital gains tax (CGT) allowance. This lets you earn up to £12,300 in profits, tax-free, when you dispose of an asset (e.g. shares).
- Dividend tax allowance. Here, you can earn up to £2,000 in dividends without tax.
- Personal savings allowance. This allows a Basic Rate taxpayer to earn up to £1,000 in interest without tax (or, £500 if you pay the Higher Rate).
Organising your investments strategically, therefore, can help save on tax. For instance, if you are planning to eventually sell some shares to put more funds into your pension, then you may want to do this before the 6th April to maximise any unused CGT allowance.
Individual savings accounts (ISAs)
Each tax year, you can put up to £20,000 into your ISA(s). Any dividends, interest and capital gains generated inside will be tax-free. If you maximised this every year over, say, 10 years, then you build a highly tax-efficient £200,000 ISA portfolio (setting aside any growth).
Consider focusing your ISA allowance on non-cash assets such as equity funds, rather than cash. The personal savings allowance is usually plenty to cover any interest you earn in any regular savings accounts.
For long-term savings and investments, a pension pot can be a highly tax-efficient option. Not only are capital gains tax-free within the “wrapper”, but the UK government will also “top up” your contributions equivalent to your highest rate of income tax. So, for some on the Higher Rate, it only “costs” 60p to put £1 into a pension (40% tax relief).
However, pensions can also help save tax in the more immediate term. Suppose you earn £70,000 per year, which puts £20,000 of your income into the Higher Rate bracket (leading to a £6,000 bill). If you can afford to, however, then putting most/all of this into your pension saves on the £6,000 tax bill – instead putting this amount to work within your pension investments.
You can put up to £40,000 into your pension(s) each tax year, or up to 100% of your yearly earnings (whichever is lower). Bear in mind that triggering the Money Purchase Annual Allowance (MPAA) rules can lower this threshold to £4,000 per year. So, be careful.
Also, a “total tax-free cap” on your pension exists – known as the Lifetime Allowance. This lets you save up to £1,073,100 in your pensions. Any withdrawals made above this amount will be taxed at 55% for lump sums or 25% for anything taken as income.
Marriage & civil partnership
Those with a spouse or civil partner can transfer assets between them (e.g. shares) without usually worrying about CGT (unless you are separated). This allows many couples to save on tax with careful financial planning.
For example, suppose a husband has used his full CGT allowance for the tax year, but his wife has not. Here, he could transfer certain shares they wish to sell – to his wife. She can then use her own CGT allowance to dispose of the assets.
In effect, therefore, being married or in a civil partnership can “double” many of your yearly tax allowances (e.g. £12,300 CGT allowance x2) – allowing your household to potentially save more and generate higher after-tax returns, overall.
Saving on needless tax is not just a matter for your own household, but also for those you may wish to pass wealth down to, one day. Inheritance tax (IHT) is levied at 40% (usually) on the value of your estate over £325,000 when you die, although transfers between married couples and civil partners are not usually subject to inheritance tax. However, there are options to mitigate this.
One idea is to pass down your family home to “direct descendants” (e.g. children), allowing you to “extend” your IHT threshold by an extra £175,000, taking it up to £500,000. You can also give away up to £3,000 to one person – or multiple people – each tax year without these gifts getting counted as part of your estate.
A range of UK schemes exist to help mitigate tax for investors including Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and AIM shares (Alternative Investment Market). Many of these offer inheritance tax relief on shares if they are held for a minimum period, and can also save tax in the short term – such as tax-free dividends from VCTs. Bear in mind, however, that many of these schemes come with a higher investment risk.
We hope this content has been informative and inspired you to build a more tax-efficient financial plan. Please get in touch if you’d like to discuss these matters with us via a free, no-commitment consultation with a member of our team:
T: 0121 446 5815
E: [email protected]