With taxation rates in the UK being so high, it’s important to take advantage of the many allowances you could be eligible for ahead of tax year end.
There are straightforward steps you can take to make sure you’re not overpaying more than you should be:
Personal Savings Allowance – the impact of higher interest
For investors, 2023 ended up being a good year, with real growth happening in November and December. With interest rates going up, those with a decent amount in the bank may now see a tax bill.
Through the Personal Savings Allowance, the first £1000 (or £500 if you’re a higher-rate taxpayer) of any income from interest is tax-free. That means any interest income over that threshold is subject to tax.
For example, if you are a basic tax rate payer with £20,000 in a savings account at a 5% interest rate, this gives you an annual interest income of £1000. Your entire Personal Savings Allowance has been used up. A higher interest rate may increase your income interest, but may also increase your tax bill.
Dividends: Reduction in allowances
The Dividends Allowance – the amount you can receive in dividends before paying tax – has reduced for this financial year, from £2000 to just £1000. It will reduce again to £500 in the 2024-25 tax year. This means that you could be paying more tax on your dividends.
However, dividend income from assets held in ISAs continue to remain tax-free.
Capital Gains Tax
The Capital Gains Tax Allowance (CGT) for 2023-24 is £6000, a significant reduction from £12,300 in the previous tax year. It is paid on the gain when you sell, for example, a second home, or a personal possession over £6000 that isn’t a car.
However, if you held funds in an ISA, you don’t pay Capital Gains Tax on the gains you make.
Furthermore, the amount of CGT you pay is linked to your income. Increasing pension contributions reduces your taxable income, which may change your tax band and the rate of Capital Gains Tax you are charged.
Rent a Room Relief
If you rent out a room in your home, you can earn up to £7,500 per year tax-free (halved if you share the income with a partner, for example).
This exemption is automatic – if you don’t earn above this threshold, you won’t need to do anything.
Using an Individual Savings Account (ISA), you can save funds and not need to pay tax on cash, interest, income or capital gains from investments, as well as offering flexible access to your savings.
You can save up to £20,000 per year within an ISA tax-free. However, if you don’t use up your ISA allowance by the end of each tax year, it is gone, and can’t be carried forward.
How pension contributions can provide tax relief
The examples above demonstrate some tax implications you may face. However, you can benefit from tax relief to help offset this via your pension. This kind of tax relief exists because the government wants to incentivise people to save for their retirement.
By paying into your pension, you can help reduce the amount of tax you pay, increase your savings for the future and ensure you don’t lose certain entitlements.
If you earn over £100,000, your tax-free Personal Allowance starts to taper, and reaches zero if your income exceeds £125,140. However, by paying more of your salary into a pension, your final amount of adjusted net income is reduced. If it is reduced to under £100,000, you maintain your Personal Allowance.
Increasing your pension contributions can also ensure you don’t lose out on certain entitlements. For example, if you earn over £50,000, the amount of Child Benefit entitlement you receive reduces in the form of a ‘tax charge’. By reducing your net income through pension contributions to under £50,000, this charge will be avoided.
The level of tax relief available varies depending on how your pension works, or the rate of income tax you pay. It’s very important to ensure your pension is set up correctly, and that you are aware of any restrictions in place. A Chartered financial planner can help you with this.
There are many more forms of tax to be mindful of in the UK, and if you ask me, it’s far more complicated than it needs to be.
If a tax is due, there are allowances and reliefs you can take advantage of to mitigate your final bill. I would also recommend reviewing if your funds should be shared with a spouse or partner, or remain in the individual’s name – a financial planner can support you with these decisions.
If you find yourself paying a tax, stop and think: could some or all of it be avoided?
If you would like to speak with one of our pension experts, message us or call us on 01480 869466 for a free initial, no obligation chat.
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