With inflation, energy bills and taxes all increasing, most households will be looking at ways to make their finances more efficient.
For those at the lower end of the income and wealth scale making ends meet is a real problem. For those with greater wealth built up the cost of living crunch will be less painful, but many of them will nonetheless have the enviable challenge of wanting to make their savings as tax-friendly as possible.
Although the end of the tax year is just two weeks away it isn’t too late to think about employing some effective tactics, such as making sure you have made full use of your Isa and pension allowances.
An Isa and pension’s tax benefits are the obvious route, but there are other tax-incentivised investments that could help you keep more of your money growing too. Jason Hollands, managing director of investing platform Bestinvest, reveals his six top tips to help reduce your tax burden before 5 April.
Use your annual pensions allowances
Pensions get tax relief on contributions, taking most people back to the position they were in before income tax was paid. You could pay more into your workplace scheme or into a private Sipp (self invested personal pension).
An automatic 25 per cent uplift is applied to contributions to cover 20 per cent basic rate tax – taking £80 paid in back up to the £100 before tax was charged. Higher rate taxpayers must claim back the extra tax relief on money paid into a Sipp or work defined contribution, unless the latter is done through salary sacrifice.
‘Nothing beats pensions when it comes to tax perks, with contributions attracting tax relief at your marginal income tax rate. This means a 40 per cent income tax payer can get £10,000 of pension at a net cost of just £6,000, once the tax reliefs are factored in,’ says Hollands.
‘If you have not hit your annual £40,000 pension contribution allowance, then consider using any spare funds to take advantage of the generous tax reliefs on offer. But keep an eye on your Lifetime Allowance too.’
‘You can also carry forward unused annual allowances from the last three tax years, to add an even larger lump sum into your pot – although the total contribution over the tax year is still subject to the limit that it cannot exceed your annual gross earnings.
‘Currently you are about to lose the option of using unused allowance from the tax year 2018/19. It may be that you maxed out the allowances in the following two tax years – so is it worth using this allowance before it disappears for good?’
Use – or lose – your Isa allowances
Up to £20,000 per adult can be subscribed to an Isa before midnight on 5 April, with all returns generated within it sheltered from future taxation.
Hollands says: ‘If you are unsure of where to invest, you can fund your Isa initially with cash between now and then to use up any of the allowance that remains. Investments do not have to be purchased before then.’
Payments into a Lifetime Isa- available to those under 40 – come out of your overall Isa allowance. But the government’s top-up means that for some savers – like those building up a deposit to purchase their first home – using up the annual £4,000 limit may well be worthwhile.
Start saving for children
‘Early saving at or soon after the birth of a child is a powerful tool that can generate big pots by the time they reach adulthood,’ says Hollands.
The Junior Isa allowance is £9,000 a year and even those who are not paying tax are entitled to tax relief on pension contributions of £2,880 a year (which the top-up takes to £3,600), the so-called ‘basic amount’.
This means a pension with tax benefits can be opened for a child of any age – or a non-earning spouse.
Be strategic with capital gains
Each year everyone has a tax-free capital gains allowance, currently £12,300 and above this they must may tax on chargeable gains.
For many profits larger than this are unlikley, but if you have built up investments outside of an Isa or pension then you may find you have holdings with gains in excess of the annual allowance.
Selling some to use your allowance each year, and perhaps reinvesting through a more tax-friendly Isa can make sense.
Bestinvest suggests taking advantage of the annual Capital Gains Tax (CGT) exemption which can protect you from a large bill when you come to dispose of an investment.
It can also be used to transfer investments that are held outside an Isa in a process called ‘Bed and Isa’ but the investment platform says you must act quickly as funds will need to be sold down to cash and moved into the Isa before 5 April and it can take a few days to clear.
‘Equally it might be beneficial to crystallise some losses by making a disposal of poorly performing assets to bring the year’s overall capital gains down below the annual allowance.
‘If you are married or in a civil partnership, then inter-spousal transfers can be used to make sure both partners’ allowances are used optimally. When shares, for instance, are transferred from one spouse to another, it is assumed they are given at cost value and therefore don’t trigger a tax liability. The CGT allowance for that year of the spouse who receives the transfer then comes into play.’
Consider other tax-incentivised investments
Investors in Venture Capital Trust (VCTs) can claim up to 30 per cent income tax relief on the amount they have invested in a VCT, provided they hold the investment for at least five years.
The amount of income tax investors claim cannot exceed their amount of income tax due.
VCTs also offer tax-free capital gains and tax-free dividends.
Aside from the tax benefits, VCTs also offer investors exposure to the UK’s growing number of high-growth technology companies.
Hollands says that ‘it is important to understand that VCTs are high risk investments which target small, early-stage and illiquid companies’.
‘While VCTs are not suitable for most investors they can be useful for high earners with substantial portfolios who are already maximising use of Isas and pensions and who understand the risks.’
Many VCT offers have already closed for this tax year and with capacity in each offer strictly limited, those interested in VCT investing should not delay.
Gifts to reduce Inheritance Tax liability
Finally there are a number of tax-free financial gifts that you can make each year. These leave your estate immediately so there won’t be any inheritance tax to pay.