The new tax year has only just begun, which makes it a good time to assess your personal finances with a view to cutting your next self assessment tax bill.
We have collated some of the top allowances, rules and tips to ensure you are getting everything you are entitled to.
To begin with it is worth reminding ourselves of the income tax thresholds and how the tax is calculated.
The UK has a progressive tax system where tax payers are charged higher rates on higher levels of their income through tax bands.
Taxpayers are given a tax free allowance of up to £12,570 and then the tax bands are used to evaluate the percentage and amnount they pay at the different income levels.
It is important to bear in mind that income tax is payable on all income, not just earnings. So income from investments, including those held abroad, pensions, property and savings (subject to allowances) are all taxable.
Unfortunately, the tax thresholds are unlikely to change for several years in an attempt to repair the state of the public finances. This is known as fiscal drag, and is a (relatively) discreet way the chancellor can increase the Treasury’s tax take without putting up tax rates. Given the high rate of pay inflation at the moment, a great many more people are likely to become higher rate taxpayers before the beginning of the 2028 tax year, which is thought to be when the allowances will next be changed.
1. Personal Allowance
In 2023 everyone in the UK gets a personal allowance of £12,570, on which no income is to be paid unless your income goes over the personal allowance threshold of £100,000.
For income levels over £100,000 the personal allowance drops by £1 for every £2 earned between £100,000 and £125,140. This has the effect of giving people whose income is more than £125,140 a zero personal allowance.
Marriage tax allowance
Those who are married or in a civil partnership can transfer up to 10% of their personal allowance (£1,260) to their partner. The partner receiving the extra allowance has to have income below the personal allowance and the donating partner’s income must be below the higher rate tax threshold. This yields a tax saving of up to £250 a year. You can also backdate your application by up to three years.
2. Savings Allowances
Some savings interest can be tax free.
Personal savings allowances
Non or basic rate taxpayers can get up to £1,000 of savings interest tax free.
Higher rate taxpayers can get up to £500 of savings interest tax free.
Additional rate taxpayers are not eligible for this allowance.
Savings rate band
This is also known as the starting rate for savings. Those with an annual income of less than £17,500 a year do not have to pay income tax on savings interest of up to £5,000. Every pound of income above the personal allowance reduces the starting rate for savings by £1.
ISA allowance
This is £20,000 a year. People can invest up to this sum in an individual savings account and not pay capital gains tax or income tax on any rise in value. Cash can be put in an ISA so the interest earned on it is tax free or they can put shares or other investments in one.
Premium Bonds
Premium Bonds are an investment product by National Savings and Investment (NS&I).
Unlike other investments, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win between £25 and £1 million tax free.
3. Dividend allowance
You can receive up to £2,000 of income from dividends tax free. This benefits those who own shares in companies or who are directors of their own company. If you are the latter, you could consider appointing your spouse as a director to benefit from his or her dividend allowance.
Dividend tax is also banded using the same income levels as income tax shown in the table above.
4. Pension annual allowance
Pensions are where the greatest potential financial benefit is achievable among allowances.
Until you are 75 you can contribute up to 100% of earnings or £60,000 into a pension tax free. Only earnings net of this contribution are liable for income tax. This is particularly useful for those who want to reduce the amount of higher rate or additional rate tax they pay. Thus income that would be taxable now at 40% or 45% could be taken in retirement when earned income is nil and thus some or all of the pension income would be taxed at the standard rate of 20%.
In addition money in a pension is not subject to capital gains tax and sums remaining at death do not attract inheritance tax.
Business owners can make pension contributions via their company, which reduces their liability for corporation tax.
Pension carry forward allowance
Allowances from the previous three tax years can be carried forward. Thus up to £160,000 could potentially be added to a pension in one tax year.
Childrens Pensions
You can also save tax-efficiently for your child’s future retirement with children’s pensions.
You can save up to £2,880 each tax year with the government automatically topping up any contribution by up to £720 (which is tax relief of 20% on your gross (total) contribution). This means your contribution automatically becomes £3,600 per year, per child.
When your child turns 18 they become the owner of the pension. They can continue to contribute or leave the savings invested. They can't access the pension pot, under current legislation before age 55 years, so pensions aren't suitable as short-term savings vehicles.
When they retire, the child can usually take up to 25% of their pension fund as a tax-free lump sum under current rules.
Their regular pension income is then taxed along with the rest of your income.
5. Investment reliefs
Venture capital trusts
Wealthy taxpayers can contribute up to £200,000 a year into a venture capital trust (VCT). They get 30% tax relief on their investment so an investment of £70,000 equates to one of £100,000. Dividends are tax free and so long as the investment is held for at least five years no capital gains tax is payable. The trusts invest taxpayers’ money into various early-stage companies.
Enterprise Investment Scheme
Investing in companies that are eligible for the Enterprise Investment Scheme (EIS) has tax advantages. Relief of 30% of the value of the investment is claimable; this also has the effect of reducing some of the risk of investing in an early-stage company. As long as the investment is maintained for at least three years, no CGT is payable on any gain. And CGT due on other assets can be deferred if the capital gain is invested in an EIS company. Similarly, subject to eligibility, inheritance tax relief is available on EIS shares. Up to £1 million or £2 million a year can be invested, depending on the type of business.
The Seed Enterprise Investment Scheme is an offshoot of the EIS and offers more generous relief as seed companies are likely to be a more uncertain investment as at an earlier stage of existence. Clearly this is a higher risk form of tax efficiency planning so is unlikely to be suitable for people without financial or business expertise. However, the reliefs are more generous than those of a VCT to reflect that.
6. Capital Gains Tax
Capital gains tax (CGT) is payable at 10% to 28% on gains from investments. This might be from the sale of shares whose value has gone up or from a non-residential property. The tax-free CGT allowance fell to £6,000 in the 2023-24 tax year from £12,300 previously.
You do not pay CGT on the sale of your main residence; however you do pay it for periods when it was let in respect of any gain in value during that period. Fortunately, CGT is not payable in respect of the nine months before a rental property is sold.
Inheritance tax is payable at 40% above the nil rate band, which is currently £325,000. A deceased spouse’s nil rate band can be inherited by the surviving partner, in effect doubling it to £650,000.
Consequently, given the historically high level of tax on UK individuals, it is well worth people taking a hard look at their personal finances to see where and how tax savings can be made. Below we list the 10 most important ways of achieving tax savings.
7. PAYE Claimable Expenses
Travel expenses
Tax relief is available for work-related travel, which unfortunately does not include commuting. Claims can be made in respect of temporary places of work and home workers can claim for visits to clients. You can get relief of 45p per mile for up to 10,000 miles and 25p a mile above 10,000 miles.
Homeworking
Homeworkers can claim for part of of their household bills, such as utilities, mortgage interest, insurance and council tax. There are two ways to claim.
Firstly, simplified flat rate. This is £10 a month for working hours between 25 and 50; £18 a month for between 51 and 100 hours and £26 a month for working hours above 100 a week.
Secondly, people can claim for the expenses actually incurred. These cannot include the proportion of bills related to non-work use of the premises. Similarly, personal mobile phone costs cannot be claimed even if the phone is also used for work.
Work clothes
People engaged in certain trades and professions may claim for work-related clothes. This is typically labelled uniforms or safety-related items and not therefore suits and dresses, for example, even if these have a work purpose. Similarly, tax relief is available for subscriptions to trade or professional bodies, or to professional journals. HMRC has more details.
Training and courses
Costs relating to these can be tax deductible but they must of course be relevant to your work.
8. Self Employed Expenses
If you are running a business as a self employed person then it is important to ensure you are claiming every expense that you are allowed.
There are numerous categories that people often don't consider but the largest differences we see are often in the calculations of the use of their home and motor/travel costs for their business.
We have produced a seperate article on this which can be found here.
9. Charitable giving
A higher rate taxpayer can claim back 25p in the pound for charitable giving.
10. Property Landlords
One underused way of reduced tax liability available to landlords is, where applicable, to move part of their residential mortgage to one of their rental properties. Mortgage costs on buy-to-let properties attract 20% tax relief whereas residential mortgages do not receive tax relief. To achieve maximum benefit both mortgages would need to be outside fixed rate periods or early repayment charges could be payable on the residential property mortgage and the corresponding additional borrowing on the rental property could then ideally become part of a new fixed rate deal rather than be a second mortgage. This would simplify moving on to a new fixed rate deal in due course.
Landlords may also claim most costs related to managing the property, for example, insurance, professional and management fees and council tax. As mentioned above, only very limited relief is available for finance costs. However, this does not apply to non-residential rental property. In this case the full amount of finance interest costs can be claimed.
People letting a room in their homes receive the first £7,500 of income a year tax free under the rent a room scheme.
People who are thinking of buying a rental property are likely to pay less tax if they set up a company that owns the property. This is especially so for higher rate taxpayers.
Conclusion
The beginning of the new tax year on 6 April is the ideal time to start tax planning for the year ahead. This ensures allowances, for example the £20,000 ISA allowance, are used to their maximum effect.
Thanks to fiscal drag, the tax burden is likely to get more onerous in the coming years, so it is all the more important to consult with your accountant to make sure your personal tax arrangements are as efficient as possible.
If you want to save personal tax then contact our accountants today!
