Everyone has to pay taxes, but there are ways to reduce your tax bill if you know which allowances apply to you and your situation. Various tax allowances are available until the end of the financial year, which runs until 5 April. We share ten ways to make the most of tax relief and allowances to help you minimise the amount of tax you will need to pay.
“In this world, nothing is certain except death and taxes.”
- Personal savings allowance
Let’s start with your savings. Basic rate or non-taxpayers are entitled to £1,000 tax-free savings each year. If you’re a higher-rate taxpayer, then your allowance will be £500. Married or civil partners can use these allowances against any joint savings.
- Personal tax allowance
Everyone has a personal tax allowance, which means you only start paying tax on earnings above the threshold. This is currently £12,570 and is set to be frozen until 2028. Income isn’t just your wages. You can apply this allowance to income from pensions, rentals, and offshore bonds. For earnings over £100,000, you will lose your personal allowance, but you can reclaim it by paying into your pension – please talk to us about this.
- Marriage tax allowance
Another way to reduce income tax is to use the marriage tax allowance available to married or civil partners. This allowance only applies if one person earns less than the above personal tax threshold and the other earns less than the higher rate tax threshold (£50,271). You can transfer 10% of the lower earner’s tax allowance to the higher earner to reduce their tax bill and backdate this by three years.
- ISA allowances
Every year you get an allowance for your ISA account, which allows you to save up to £20,000 tax-free. This allowance applies to either a cash ISA or a stocks and shares ISA. One of the big benefits of having an ISA is that you are exempt from capital gains tax in terms of growth and dividend tax.
- Dividend allowance
If you are a company director or own shares, you are currently allowed up to £2,000 per year of tax-free dividends (tax year 2022 – 23). However, there have been significant changes to the dividend allowance. The allowance is set to reduce from April 2023 to £1,000 and £500 from April 2024.
- Capital gains tax allowance
Capital gains tax applies when you profit from an asset you have sold, such as property. Everyone has an annual capital gains tax allowance, which is currently £12,300, and this allowance doubles for married couples and civil partnerships. However, applying this tax allowance can become complicated, especially when a couple divorces – we will cover this topic in more detail in January.
- Pension allowance
You can pay up to £40,000 into your pension every year tax-free. The government also offers tax relief on pension contributions at 20%, which helps you to grow your pension pot. Your pension funds are exempt from inheritance tax. Business owners can make pension contributions through their companies, which is a tax-deductible business expense. So, you can use this to reduce your corporation tax.
- Pension carry forward
If you haven’t used your annual pension allowance, you can carry forward your pension allowances from the previous three years. For example, you could contribute up to £160,000 (£40,000 each year from the past three years). There are complex rules relating to pensions – for advice, speak to our financial planners.
- Charitable donations and gift-giving exemptions
If you donate to charity, you can claim back the tax on your donation through gift aid. The difference you can claim will be at the basic rate, no matter what level of taxpayer you are. Remember to include this on your tax return. You also have an annual gift amount of £3,000. This won’t be liable for inheritance tax if you live for seven years after you have gifted to someone who is not your spouse or civil partner.
- Know your tax code
Last but not least, the key to ensuring you are paying the right amount of tax is to check you have the correct tax code. It’s a common mistake, which can happen after you have changed jobs, and you could get a refund of hundreds of pounds. Make sure your tax code is correct for your current situation by using the HMRC website.
Reducing tax bills is not most people’s top priority at this time of year. But with some advanced financial planning, you will be more prepared, which means you’re less likely to face a stressful year-end. Our professional financial planning team can advise you on various ways to minimise your tax liabilities and make your money work harder for you.
When it comes to financial planning and tax advice in the new year, get in touch to speak to our financial planners. We can also connect you to trusted accountants.