Seven simple ways to reduce your tax bill

Posted by Adrian Lowcock in Government and taxation category on 23 Mar 20

No one wants to pay more tax than they have to and reducing the tax you pay could also give your investments a boost.

We have 7 top tips to help if you are looking for simple and effective ways to shelter your investments from taxes today as well as offering some protection against future tax rises. Please note, tax rules can change and any benefits will depend on your individual circumstances.

1. Use your ISA allowance

Over 11 million people contributed to an ISA in the 2017/18 tax year. It’s easy to see why they do it. ISAs are simple, flexible and are one of the best ways to shelter your investments from the taxman.

If you are over 18 and a UK resident, you can place up to £20,000 into a stocks and shares ISA this tax year. Once inside it can grow freely as there is no UK income or capital gains tax to pay on any income or growth in the value of your investments. ISAs can also be very flexible, you can take money out if you really need to - although investing is for the long term.

The ISA allowance is one of most generous tax breaks from the government and we believe every investor should consider using it.

The tax year ends on 5 April. So if you want to make full use of your allowance this year, you should act soon.


2. Put money into your pension

Investing in a pension for retirement is another of the most tax-efficient ways to save.  However, there are still question marks over how long the tax reliefs on contributions will remain available in their current form.

Pension contributions currently receive up to 45% tax relief. For example, a £1,000 investment into a self-invested personal pension (SIPP) benefits from 20% basic rate tax relief (£250) added automatically. Higher-rate taxpayers can claim up to a further £250 in tax relief, whilst additional rate taxpayers can claim back up to £312.50.

You must pay sufficient tax at the higher or additional rate to claim the full tax relief through your tax return.

If you are a UK resident and under the age of 75, the general rule is you can contribute as much as you earn to pensions per tax year and receive tax relief. Contributions over the annual allowance (currently £40,000 for most people) will be subject to a tax charge. Remember normally you cannot take money out of a pension until you’re 55 (57 from 2028).


3. Use your capital gains allowance

Each year you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2019/20), the allowance is £12,000. A basic rate taxpayer will pay 10% tax on any realised investment gains over and above their allowance. For a higher or additional rate taxpayer, it is 20%.

To take advantage of this allowance, you will need to do so before the end of the tax year (5 April) as you the allowance cannot be carried through to the next year.

4. Protect your income

At the moment all taxpayers have a tax-free dividend allowance of £2,000 a year. After this, the rate of tax payable on dividend income will depend on the investor’s other taxable income. The allowance can be very useful for investors who have exhausted their annual ISA allowance.

If you haven’t utilised your full ISA allowance on the other hand, you may want to consider sheltering income producing invesmtents in a tax wrapper, like a stocks and shares ISA.

5. Pension for a spouse

Investing in a pension for a non-earning spouse is one of the more generous of government allowances.

Non-earners can make a £2,880 pension contribution and the government adds £720 in tax relief, even if the individual pays no tax.

Pensions can usually be accessed from age 55 (57 from 2028), 25% of the value of the pension fund can normally be taken as tax-free cash, with the balance being taxable. However, if further withdrawals fall within the individual’s personal income tax allowance each year, these may also be tax-free.


6. Consider Junior ISAs

One of the most powerful forces when it comes to investing is time. The longer you are invested for the better. A Junior ISA could help your children, or grandchildren, get off to a good start in life. Parents or legal guardians can open a Junior ISA. The limit for this tax year (2019/20) is £4,368, increasing to £9,000 for the 2020/21 tax year.

The money stays invested until the child turns 18 at which point the ISA becomes an adult ISA and they can either access the money or keep it invested.


7. Make more of your personal savings allowance

If you hold cash deposits outside of tax-wrappers like ISAs, every year you can earn up to £1,000 in savings interest before you pay any tax. This is called the personal savings allowance (PSA). The amount you can earn tax-free differs depending on your tax position.

Basic rate taxpayers have the full £1,000 allowance, dropping to £500 for higher rate tax-payers and to zero if you are an additional rate tax-payer.

To make the most of this allowance you need to make sure you are earning a good rate of interest on your cash. However, with the interest rates so low it is important to shop around and make sure you get the best rates possible.