With the end of the tax year imminent now is a good time to check you are making the most of your tax-friendly benefits.
Tax years run from 6 April one year to 5 April the next and, in most cases, if you don’t use the various tax-free allowances they are lost forever.
This is particularly important for higher earners who face official rates of tax of 40 and 45 per cent – but in some cases pay marginal rates of 60 per cent.
But what do they need to do before the calendar flips over to a new tax year on 6 April? We asked a selection of financial experts what they would recommend for high earners.
Year end: The end of the financial year offers a good opportunity to make sure you aren’t missing out on tax saving measures
Use your Isa allowance
An Isa is one of the financial experts’ top ways to stop tax eating your returns.
Isas are often the first port of call for investors and savers looking to save tax, owing to the product range and flexibility which makes them suitable for a variety of savings and investment needs.
By using as much of your full Isa allowance as possible each year (£20,000 in the current 2022/23 tax year) it’s possible to build up a large pot of money sheltered from tax.
Once the tax year ends your Isa allowance for that year expires – it’s a use it or lose it situation.
Profits on the sale of stocks and shares within an Isa are free from capital gains tax, as are any dividends.
For savers, interest is free of tax.
> Check the best cash Isa rates in our tables
> Read our guide to the best stocks and shares Isas
An Isa is particularly important, as from the start of the 2023 tax year capital gains and dividend allowance limits are being dramatically hacked back – 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-free status.
Chief investment analyst at Charles Stanley, Rob Morgan, says ‘Remember too that Isa investments, don’t need to be declared on a tax return, so they can also be really helpful in simplifying your finances, particularly if you’re likely to be impacted by the dividend tax or capital gains tax changes happening in April 2023.’
> Read our essential guide to Isas
Should you make some capital gains?
The tax-free capital gains tax allowance is being reduced to £6,000 in April from its current limit of £12,300, following the Chancellor’s Autumn statement in November, and will reduce again to £3,000 from April 2024.
The tax is levied on investment profits – unless they are within a tax efficient wrapper, such as an Isa or pension.
Partner at financial planning firm Saltus, Jordan Gillies, says, ‘If you have any unrealised capital gains, make disposals up to your annual allowance of £12,300. Do this properly and you should be able to reduce your tax exposure every single year.’
> Should you sell some investments now? Why a Bed & Isa could pay off
Pensions: It may seem obvious but making the most of your pension is an efficent way to avoid the tax man
Got a tax question?
Heather Rogers, founder and owner of Aston Accountancy, is This is Money’s tax columnist.
She can answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.
You can write to Heather at firstname.lastname@example.org. Please put TAX QUESTION in the subject line.
Can you increase your pension contributions?
Pensions are the tax-efficient way to save for retirement, whether through workplace or personal schemes.
High earners with the ability to save more can make good use of pension allowances to maximise tax-friendly investing but must remember they can’t get at the money until at least age 55.
Tax relief pension on contributions increases the amount that goes in. This effectively means that you are investing into your pension out of untaxed income.
Everyone gets basic rate tax relief of 20 per cent automatically; higher rate and additional taxpayers must claim the rest of their 40 per cent and 45 per cent relief themselves.
If you are still working your employer will make valuable contributions on top of what you put in.
Furthermore, if your contributions are made via salary sacrifice then your pension contributions will be made before income tax and National Insurance.
In the Spring Budget, Chancellor Jeremy Hunt increased the annual allowance for pensions to £60,000 from the next tax year. The lowest level of tapered annual allowance for high earners, who start to see their allowance fall above adjusted earnings of £260,000, will increase from £4,000 to £10,000.
Hunt also removed the pensions lifetime allowance cap that stood at just over £1.07million, but these changes don’t come in until 6 April.
However, there are some pension moves that you can make now if you can afford it. You can use up this year’s £40,000 annual allowance and can also look back over the past three tax years to make up for any previous unused allowance.
However, there are nuances within the rules, so if you have a lot to contribute this is one to ask a professional wealth planner or financial adviser about.
Are you being caught by the 60 per cent tax trap?
Pensions contributions are also a good way to avoid the 60 per cent tax trap if you earn over £100,000.
For every £2 earned over the £100,000 threshold, £1 of personal allowance is lost. If you earn £125,140, you’ll lose your personal allowance in its entirety.
By making pension contributions, you can reduce your taxable income and potentially reclaim your personal allowance, adds Gillis.
Should you think about inheritance tax?
Gifting money to others during your lifetime is the simplest way to reduce the size of your estate and therefore the tax payable on it when you pass away.
Currently inheritance tax is payable at a rate of 40 per cent on estates worth over the nil rate band of £325,000.
But an extra allowance, the residence nil rate band increases the threshold by £175,000 if you leave your home to direct descendants.
That means the IHT threshold is potentially a joint £1million, if you have a partner and own a property.
Watch out though, as once an estate reaches £2million this own home allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million.
The best way to avoid inheritance tax is to spend your money or give it away well in advance.
There are some annual gifts automatically exempt from inheritance tax, including up to £3,000 per year, which can be given to one person or divided between a number of people, plus you can give £250 a year to as many people as you like, says Morgan.
You can hand unlimited sums 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 automatically becomes free of inheritance tax.
If you die before the seven years are up, inheritance tax is levied on a sliding scale – starting at the full whack of 40 per cent if it’s within the first three years.
> Read more: How to avoid inheritance tax legally
IHT: Once you hit the threshold 40% of your estate may be lost to tax so it pays to use your tax free allowances
Are you making the most of other tax reliefs?
Amid pensions and Isas it can be easy to forget the tax savings you can make on charitable donations and work expenses.
If you’re a UK taxpayer, you can claim back the difference between the basic rate of tax (20 per cent) and the rate you pay on your donations, says David Gibb a financial adviser at Quilter.
He says: ‘For example, if you donate £100 to a charity, they will claim back £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 tax return or by contacting HM Revenue and Customs.’
And if you are self-employed or have work related expenses, you may be able to claim tax relief on them.
‘The amount of tax relief you can claim depends on the type of expense and your personal circumstances, so it’s worth speaking to a tax expert to find out what you can claim.’
How to make the most of saving and investing in an Isa
There’s not long left until the end of the tax year – and that means it is time to sort your Isa if you haven’t already.
This year’s Isa allowance runs out as the tax year ticks over on 6 April and it pays to get everything you can into the tax-free shelter for savings and investments.
But what are the important things you need to know, the tips for making the most of your Isa – and why does it matter more this year than it has done before.
On this Isa saving and investing special podcast, Georgie Frost and Simon Lambert talk all things Isas – from finding the best saving rates, to how to invest and how to boost your chance of investment success if you already have a stocks and shares Isa.
Press play to listen on the player above, or listen at Apple Podcasts, Audioboom, YouTube and Spotify or visit our This is Money Podcast page.
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