Weekly Spotlight: Cutting your tax bill
They say there’s nothing certain except death and taxes, and even in these uncertain times figures from Her Majesty’s revenue, out last week2, show that we’re paying more than ever of the latter.
Income tax receipts rose to £193 billion for the 2019-20 tax year, a 1.16 per cent rise on the year before. The figures represent a constant rise in receipts over the last six years: in 2008-9, tax receipts were £163 billion, and in 2017-18 they were £180 billion.
Who is paying it all? The figures show that whether you complete a tax form or not, your total tax receipts have risen, but those who complete a Self Assessment Form have seen a greater increase than those who do not.
However, if you do complete such a form there are many different ways to ensure you don’t pay more tax than you need to, and a financial adviser can help you to make the absolute most of this. Here are some of the things you should think about.
One of the most valuable things you can do to ensure you save tax while saving for the future is to contribute to a pension. The government will add back the basic rate tax you have paid on any pension contributions, and you can reclaim the rest through your tax form.
Once you’ve set up your pension it can save tax in another way as well: pensions are outside of your estate for inheritance tax purposes, so if you don’t need to use it you can pass it down to your family very tax efficiently too.
Gift Aid on charitable contributions
Higher or additional taxpayers who give regularly to charity can also get a boost through their Self Assessment form. While basic rate tax is repaid on Gift Aided donations, the higher rate tax can also be recovered through the tax form, so make sure you keep annual records through the year.
Salary Sacrifice and tax-free childcare
If your employer runs a salary sacrifice scheme, you can give up some of your salary in exchange for benefits, and these can be given to you free of national insurance and income tax in some cases. These include some schemes for buying technology or bikes, as well as pension contributions.
There is also the tax-free childcare scheme, which allows you to save up to £2000 a year for each child into an account to pay for your childcare while saving tax - the government adds 20p for every 80p you pay in.
Ordinarily, you’d pay income tax on savings interest above £1000 as a basic rate taxpayer or above £500 as a higher rate taxpayer. However, any interest on money that is saved in an ISA is not subject to income tax or capital gains tax.
You can put £20,000 a year into an ISA and switch it between savings and investments as you wish, which means it’s a very flexible way to keep money out of the taxman’s hands.
Younger people may want to consider a Lifetime ISA, which is available to those under 40 and gives a tax-free bonus of 25 per cent on contributions as well as tax-free growth - but this must be used to buy a first home or withdrawn after the age of 60.
Income tax going forward
While much of the focus of how Chancellor Rishi Sunak is going to pay for coronavirus spending has been on reforming capital gains tax (CGT) he has repeatedly refused to rule out income tax rises2 which means it’s more important than ever to take stock of your tax bill and the measures you take to be as efficient as possible.
If you’re concerned about how to structure your savings in a tax efficient manner, a financial adviser could help you to make the most of what you have.