2nd February 2015
Recent years have witnessed a number of celebrities, including Take That’s Gary Barlow and comedian Jimmy Carr incur the wrath of HMRC for investing in complex and somewhat morally dubious tax schemes.
But there are a number of basic actions you can take to cut your tax bills and obligations, all of which are above board.
As Danny Cox, chartered financial planner, Hargreaves Lansdown says: “It’s the simplest of equations – less tax to the government means more money for you. There are plenty of legal ways to make sure your financial affairs are arranged to save as much tax as possible, which won’t so much as cause a raised eyebrow from the taxman.
“Those still feeling the pain of filing their tax return over the weekend should use their return as a checklist to reduce the amount of tax paid next year. For example, if you paid tax on interest from savings accounts; use an ISA. The longer you use tax efficient wrappers such as ISA or SIPP the greater the potential for tax savings.”
With an election round the corner, Cox believes it is unlikely Chancellor George Osborne will announce any nasty surprises but he advises it may be better to be safe than sorry by taking advantage of your tax allowances before the Budget on 18th March. Below we list Cox’s top 10 tax tips…
1. Make the most of income tax allowance and tax bands
If you are married (or in a registered civil partnership) and your spouse pays less tax than you, move income yielding savings and investments into their name, and make full use of their personal allowances and basic rate tax bands, where applicable. The increase in personal allowance to £10,000 provides greater opportunity for tax-free income.
2. Use your ISA allowance
Use your ISA allowance and shelter your savings from tax. There is no capital gains tax or further income tax on assets held in an ISA, making them one of the most tax efficient ways to save. You can invest up to £15,000 into an ISA this tax year, in any combination of cash and stocks and shares.
3. Use your pensions allowance
Investing in a pension for retirement is one of the most tax efficient ways to save, and higher rate tax relief may come under threat after the election. Pension contributions currently receive up to 45% tax relief. A £1,000 investment into a SIPP benefits from £250 basic rate tax relief added automatically. Higher rate taxpayers can claim back a further £250 back, while 45% rate taxpayers can claim back £312.50. You must pay sufficient tax at the higher/additional rate to claim the full tax relief via your tax return. If you’re a UK resident and under age 75 the general rule is you can contribute as much as you earn to pensions this tax year, effectively capped at £40,000.
4. Carry forward is back
If you have unused annual pension allowance from the past three tax years, you may be able to use it this year, increasing your £40,000 allowance. Your total allowance this year could be up to £190,000 (£50,000 carried forward from each of the last three years plus this year’s £40,000 allowance). Your total contribution must be within 100% of your earnings to receive full tax relief. With tax relief of up to 45%, £190,000 in a pension could cost a high earner as little as £104,500.
5. Pension for your spouse
Investing in pension for a non-earning spouse is one of the most generous of government pension give-aways. Non-earners can make a £2,880 pension contribution and the government add £720, even if the individual pays no tax. At retirement from age 55, 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 allowance each year, these will also be tax-free.
6. Use your capital gains tax allowance
Every year you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2014/15) the allowance is £11,000. Using your CGT allowance saves up to 28% capital gains tax. Bed & ISA is one effective way to use your capital gains tax allowance. By selling your shares or funds and immediately buying them back inside this year’s ISA as a contribution you can harvest gains up to the allowance, and then shelter them from CGT or further income within the ISA wrapper. This assumes you have made no other gains in this tax year. Making the most of your capital gains tax allowance could a save a couple up to £6,160 in CGT.
7. Register losses and use them to offset gains
Once registered, losses can used to offset gains at any time in the future, effectively increasing your capital gains tax allowance.
8. Capital Gains Tax is “better” than income tax
The top rate of income tax is 45% whereas the top rate of capital gains tax (CGT) is 28% and you can make profits of £11,000 a year (20014/15) before you start to pay CGT. It can therefore make sense to arrange you portfolio so your income-producing assets are held in a SIPP or ISA, with your growth assets outside.
9. Save Inheritance tax – get gifting
Inheritance tax (IHT) is probably the least popular tax with investors and a rising source of revenue for the Exchequer, with increasing asset values combined with years of frozen allowances. One of the best ways to save IHT is to make use of your IHT exempt gift allowances. Everyone can give away up to £3,000 a year (and up to £3,000 in respect of the previous year if this allowance was not used), meaning a couple could give away up to £12,000 now and a further £6,000 on 6th April, potentially saving £7,200 of IHT.
10. Invest in Venture Capital Trusts (VCTs) for 30% income tax relief
Taxpaying, sophisticated investors who are happy taking higher risks in return for the potential for higher rewards could consider VCTs. These invest in some of the most dynamic, entrepreneurial, high growth companies and are long term speculative investments which give you the chance to get in on the ground floor of fledgling investment opportunities. For those who pay sufficient tax, a £10,000 investment in VCT could cost as little as £7,000 after tax relief.