Time to think about tax
Let's be honest, nobody really wants to think about tax, but investing a little time in thinking can reduce the amount of tax you end up paying. As we come to the end of the tax year there couldn't be a better time to think about your tax obligations and ensure you take advantage of all your allowances.
The big one, especially for higher earners is the pension allowance. You have an annual £40K allowance that you can put into your pension pot completely tax free. If you top up your pension pot, you reduce your personal tax bill.
While it will be taxed when you come to withdraw it when you retire, your personal income will likely be much less at that point and you'll pay less tax on it. It's a very effective means of tax planning.
The only limit is that you can't have more than a total of £1,073.100 in your accumulated pension pots (excluding your state pension).
Next on your list should be a tax free ISA. This can be a stocks and shares ISA, a lifetime ISA or a cash ISA - and you can put up to £20K in your ISAs completely tax free.
Then there's the annual allowance for Capital Gains Tax (CGT). As most people's assets are in property and the rules now state that CGT must be paid within 90 days of the sale of the asset, this is harder to manage. However, if you're selling a couple of buy-to-let properties, it's wise to sell them in different tax years if possible to best utilise your allowances.
You have a nil rate band for Inheritance Tax (IHT) of £325K upon your death. As IHT runs at 40%, reducing the amount you or your family end up having to pay makes good sense. Take advantage of the annual £3K allowance that you are allowed to give as gifts tax free.
This can be in cash or assets, to one person or many, so you can gift £3K to your son or daughter or £500 each to six of your grandchildren. These gifts are not affected by the 7 year rule, where any gift given within 7 years of the giver's demise count towards the total of their estate that will be subject to inheritance tax.
While your family home isn't subject to inheritance tax, unless it exceeds £1.2 million in value and the shares in a family business can be transferred to another member of the family tax-free, it's good sense to keep tabs on the value of your estate and take steps to reduce the tax bill. As these issues can be complex, it's wise to consult and expert (that would be us!) to ensure you have the best possible tax set up.
Finally there are the other personal allowances that you should ensure you take maximum advantage of:
- Your personal tax allowance is £12,500 and, while most people earn more than that in a year, if you're self-employed or run your own company, you can make the most of this by employing your spouse or partner in an administrative role and paying them £12,500 per annum tax free. There will be a small amount to pay in National Insurance, but it means that you can double the household tax free income.
- The dividend allowance, allowing any shareholder in a company to earn £2K tax free. However, that's a total of £2K from ALL shares held.
- There's also a savings allowance of £1K for basic rate tax payers, which means that you can earn up to £1K from any savings income or interest you may make from money you've lent to someone else.
So, think about your tax allowances, is there any of them that you could make better use of? Do it now - before the end of the financial year.