Less tax, more cash: how to get ahead on personal tax

With 5 April looming on the horizon, many people will now be turning their thoughts to the dreaded end-of-year tax bill.  It’s a pain point for many, particularly those who fall into the ‘high net worth’ category who can often find themselves hit the hardest.

Did you know, however, that with a bit of planning and just a bit more work, there are a number of ways that you can reduce the hit from the taxman?  And that at the same time you can maximise the feel-good factor by spreading potential liabilities in such a way that will bring future benefit to you, your family or those you care about?

Here are our top five tips for getting ahead of your tax affairs before you need to talk to HMRC.

  1. Pension, pension, pension

If you’re looking for a quick return on your investment as well as paying less tax, then pensions are the place to look.  Contributions receive income tax relief at your marginal rate, meaning people paying tax at the highest level will see every 60p contributed to a pension immediately boosted to £1 by the government.

In addition, any UK resident under the age of 75 can contribute up to £2,880 into a stakeholder pension each year, irrespective of income or employment status.  This means payments can be funded for non-working spouses and children.  An additional 20% can be reclaimed by the pension provider as tax relief from HMRC, taking the policy up to £3,600 each year.  You should be aware that these funds are locked into a pension plan and won’t be accessible until the minimum pension age; this is currently 55 but the government has confirmed that this will be increased to 58 in the year 2028.

  1. Make a difference through a charitable donation

The Government pays tax relief on charity donations, meaning both you and a charity can benefit from a donation.  It’s important to consider how donations are made however, as the tax relief on offer does vary.

  • The well-known ‘Gift Aid’ scheme allows charities and community amateur sports clubs to claim back an additional 25p from the government for every £1 you donate. As a higher-rate tax payer, you can then claim the difference between your rate and the basic rate through the self-assessment process.
  • If donating through your employer into a Payroll Giving scheme, this is deducted from your gross salary meaning you will pay less tax on your remaining income
  • If you’re planning for your estate, donating at least 10% as a charitable legacy will lead to a reduced inheritance tax rate
  1. Gift your family members up to £3,000 each year

As a tax-paying adult, you have an annual inheritance tax gift exemption, allowing you to gift money without worrying about inheritance tax implications.  For the year 2020/21, this currently stands at £3,000 per year which is a total allowance, meaning you will have to split this amount depending on the number of recipients you have in mind.  If all, or even part, of the prior year’s exemption (so for 2019/20) was unused, any remaining amount can be carried forward.  This means that per individual, up to £6,000 can be given away tax free.  It’s worth checking as other reliefs and exemptions may also be relevant.

  1. Make the most of ISAs

ISAs are a tax-friendly solution for anyone over the age of 18 (or 16 for cash ISAs) because any interest earnt from cash savings or investment gains are completely tax free, including from income tax and capital gains tax.  The current year ISA allowance for 2020/21 is £20,000 which can be invested in cash, UK stocks and shares, foreign shares, corporate bonds and other permitted investments. There are other types of ISA available, including the Innovative Finance and Lifetime option, but it should be noted that the annual investment limit applies as a total.

For parents, there is also the option to pay an additional tax-free £9,000 (2020/21 limit) into a Junior ISA for any child under the age of 18, however they must be a UK resident and not have a child trust fund.  The funds will be locked-in until the child is 18, at which point they can either be withdrawn or transitioned across to a standard ISA.  Unlike income arising from a gift that exceeds £100 and therefore becomes taxable on the parent, a Junior ISA is completely tax free.

  1. Maximise your capital gains tax (CGT) exemption through the partial selling of shares

As CGT is payable on the profit made from selling an asset, disposing of shares can be a costly affair.  However, you have an annual CGT allowance which means you can make gains on your investments of up to £11,000 without paying tax.  Unlike the inheritance tax gift allowance, this cannot be carried over so should be utilised each ear.

You may also want to think about investing in one of the statutorily provided tax-efficient investments available to UK residents, including:

  • National Savings
  • Enterprise Investment Scheme (EIS) – annually, you can invest up to £1,000,000 with income tax relief of 30%, or up to £2,000,000 provided the additional £1,000,000 is invested in ‘knowledge-intensive’ companies
  • Seed ESI (SEIS) – annually, you can invest up to £100,000 with income tax relief of 50%;
  • Venture Capital Trusts (VCT) – annually, you can invest £200,000 with income tax relief of 30%.

Any gains realised on the disposal of shares in the above four tax-efficient investments may be exempt from CGT.

There is some very real benefits to investing your time in tax-efficiency planning.  At TLC, our experts have a wealth of knowledge that can support your choices. Not only will your future financial position be improved, whether for yourself or for those important to you, but you can be confident that the amount you’re handing over in tax is as little as is should be.  Because who doesn’t like to know that?!

Talk to TLC Accountants today and let us help you make the most of tax-reducing benefits.

Note: TLC Accountants are not Independent Financial Advisors and cannot give financial advice.  This article is intended to highlight possible tax-break opportunities; we recommend that clients seek professional advice if required before making financial decisions.