Modified on: June 2023
10 ways to reduce your tax bill
The importance of tax planning
The tax year ends on 5th April. Tax allowances will be refreshed and unused tax allowances will be lost. The end of one tax year and the start of another provides an opportunity to make your money work harder and reduce the amount you pay in tax.
In this article, I’m going to provide you with 10 simple ways to reduce your tax bill.
Why is tax such a big deal?
Creating wealth is one thing, but maintaining and growing it is another.
Tax, left unchecked, can be a major drag. With the top rate of tax at 45%, having a well thought through tax strategy is arguably more important than a perfectly optimised investment strategy.
There are a number of legal ways to minimise the tax drag, which will allow your investments to grow more quickly.
What are the main taxes?
Before we get started, it’s worth familiarising ourselves with the main taxes:
Income tax – paid at 0% – 45% depending on your income. Also payable on savings, dividend and interest.
Capital gains tax – paid at 10% – 28% on investment gains (profits). Also payable when you sell a second property (i.e. not your own home).
Inheritance tax – paid at 40% on your death (ouch!).
When should I sort out my tax planning?
The short answer is now. Most people leave tax planning until the end of the tax year. That’s a mistake. The best time to use your tax allowances is at the start of the tax year. That way you minimise the amount of tax paid throughout the year.
But we don’t live in an ideal world. People are busy, and the end of the tax-year quickly rolls around.
But whatever you do, don’t let the tax year pass without taking action. Most tax allowances work on a ‘use it or lose it’ basis. If you don’t make use of your tax allowances in this tax year, they are lost forever.
Fortunately, you have several ‘tax allowances’ which, if used correctly, can reduce the amount of tax you pay. Also, some types of investments are tax-free.
Tax year-end checklist
Ten easy ways to reduce how much you pay in tax:
Ten ways to reduce your tax bill
Now for a little more detail:
1. Income Tax Allowance
Every person has a ‘Personal Allowance’ of £12,500. Any income received within this allowance will be tax-free. ‘Income’ isn’t just what you get from work, it includes pension income, rental income and income from offshore bonds.
If you haven’t already used your personal allowance, look to see if there are assets you can withdraw an income from tax-free.
If you earn over £100,000, including any bonuses, you will lose your personal allowance. You can reclaim your personal allowance and avoid tax on your bonus by paying it into your pension.
2. Marriage Tax Allowance
If you’re married or in a civil partnership, you can transfer up to 10% of your personal allowance to your spouse or civil partner. This is just one of the four main ways that married couples can reduce their tax bill.
To benefit as a couple, you (as the lower earner) must normally have an income below your personal allowance (£12,500) and your spouse/civil partner must have an income below the higher rate tax threshold (£50,000)
Transferring the personal allowance can save you up to £250 per in tax.
Pro-tip – you can backdate your application up to 3 years (additional £750 tax saving).
3. Personal Savings Allowance
Most people are allowed to receive some savings interest tax-free:
- For non or basic rate taxpayers, you’re allowed up to £1,000 per year.
- For higher rate taxpayers, it’s £500 per year.
- For additional rate taxpayers, nothing (sorry!).
Although this might not sound like a lot, in today’s low-interest environment it takes a lot of savings to produce £500 or £1,000 of interest.
For example, you would need to have £50,000 of savings, providing an interest rate of 1.00% to get £500 of savings interest.
And remember, each person gets this allowance. So if you hold savings jointly with your spouse or partner, you can both use your allowances.
4. Savings Rate Band
On top of this, you may be eligible for the ‘starting rate for savings’ (otherwise known as the ‘savings rate band’. This allows you to receive savings interest of up to £5,000 per year tax-free.
To be eligible for the savings rate band, you need to have ‘income’ (see above) of less than £17,500 per year.
5. ISA Allowance
Everybody has an ISA allowance of £20,000 per year. An ISA is basically just a ‘wrapper’ that can hold an asset, normally cash or stocks and shares.
Most people stick cash in their ISA. In prior years, this made sense, as any interest on savings was taxed. But with the introduction of the personal savings allowance, tax isn’t really an issue for cash savings (unless you have a significant amount).
A potentially better option is to use your ISA allowance to invest in stocks and shares. That way you are protected against dividend tax and capital gains tax (more on that later).
Don’t worry if you’ve already got a cash ISA, you can always transfer it to a Stocks and Shares ISA and keep the ISA allowance from previous years.
6. Dividend Allowance
Everybody is entitled to receive up to £2,000 per year of dividends tax-free. This is particularly useful for if you own shares (outside of an ISA) or are a director of a company.
Pro tip – if you own a company, consider appointing your spouse as a director to make use of their dividend allowance.
7. Capital Gains Tax Allowance
If you make a gain/profit on an investment (or second property) you pay capital gain tax. Everybody has a capital gains tax allowance of £12,000 per year.
You can transfer your assets to your spouse or civil partner tax-free and they can sell the gain. This is particularly useful if one of you pays a higher rate of tax than the other.
You can also sell taxable investments and reinvest them tax efficiently. For example, you could sell an investment and reinvest the proceeds in a stocks and shares ISA. This uses your capital gains tax allowance and ensures that any gains in the future are tax-free.
8. Pension Annual Allowance
Up to the age of 75, you can contribute up to 100% of your earnings or £40,000 into a pension (whichever is less). There are some restrictions for high earners, in the form of the tapered pension annual allowance.
Even if you have no income, you can contribute £2,880 per year into a pension.
The benefit to using your pension annual allowance is that funds contributed to a pension receive pension tax relief.
In addition, funds held inside a pension grow free from income and capital gains taxes and on death are not included for inheritance tax. This is just one of the many ways you can avoid inheritance tax. Here are 9 ways you can pay less inheritance tax.
If you’re a business owner, the company can make pension contributions on your behalf, which acts as a deductible business expense against corporation tax.
All in all, pensions are pretty damn good from a tax perspective.
9. Pension Carry Forward Allowance
On top of your normal pension annual allowance, you can carry forward your pension allowance from the previous three tax years (one of the rare allowances that aren’t lost each tax year).
This means that you can potentially make a contribution of up to £160,000 into your pension (£40,000 from the current year and £40,000 from each of the previous three tax years).
The rules around this can be complicated. If you want to know more, just drop me a line.
10. Venture Capital Trusts (VCTs)
You can contribute up to £200,000 per year into Venture Capital Trusts (should you have a spare £200,000 sitting around!).
The benefit of investing in a Venture Capital Trust is that you get tax relief of 30% on the money you invest. This means that if you put in £70, the Government will put in another £30 on your behalf.
Any dividends received will be free of tax and there is no capital gains tax to pay on any profits, as long as you hold the investment for five years.
Venture Capital Trusts are high-risk investments and unlikely to be suitable for most.
How can we help?
All the best,
James Mackay, Independent Financial Adviser in Bristol
P.s – make sure to check out bonus sacrifice – how to save tax
Financial Advisor Bristol and Pension Advisor Clifton
About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.
If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.
Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.
This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.
Remember that investments can go up and down in value, you may get back less than you put in.