According to the latest tax action campaign from Unbiased.co.uk, the UK taxpayer is on track to waste £4.9 billion this year, by paying more tax than required.
74% of taxpayers admit they haven’t done anything to reduce their tax waste in the last year.
With just over three weeks to go until the end of the tax year, here are our five top tips for your end of tax year financial planning.
1 – Pay the maximum amount into your ISA
UK resident and over 18? Excellent. You can invest up to £15,000 into your Individual Savings Account this tax year and benefit from tax-free returns.
Income and capital gains from ISAs are tax-free and don’t need to be disclosed on your tax self-assessment.
Parents can invest up to £4,000 a year in a Junior ISA for each child, so a family of four can shelter £38,000 from tax before 6th April.
Your ISA allowance is a ‘use it or lose it allowance’; once we reach the end of the tax year, it’s gone for good. You get a fresh ISA allowance of £15,240 at the start of the next tax year and the Junior ISA allowance for the next tax year is £4,080.
2 – Give money away to reduce your inheritance tax bill
When you die, your family will pay inheritance tax at 40% on the value of your taxable estate above the nil rate band of £325,000.
You can reduce this inheritance tax bill by giving away money or other assets to your family now.
Gifts made to your spouse or civil partner are free of inheritance tax. It’s possible to gift money to other family members over time in a very tax efficient way.
Gifts made out of normal expenditure are usually exempt from inheritance tax. You can also make exempt gifts of up to £3,000 each year, plus small gifts of £250 to as many different people as you like, and up to £5,000 to your children in the event of your marriage.
3 – Use your annual capital gains tax exemption
If your investments have grown in value, now might be a good time to sell them and use up some of your annual capital gains tax exemption.
You can realise tax-free capital gains of up to £11,000 by the end of the tax year. This is another ‘use it or lose it’ exemption, as any unused amount cannot be carried forward to the next tax year.
If you’re married or have a civil partner, you can transfer assets to them first and then they can use their unused capital gains tax exemption, so a couple can realise capital gains of up to £22,000 by the end of this tax year, even if only one partner owns the investments.
4 – Make the most of your pension allowances
The annual allowance for tax relievable pension contributions is £40,000 for pension input periods ending in this tax year. You get basic rate income tax relief at 20% on your pension contributions, added directly to your pension pot, and higher or additional rate taxpayers can claim extra tax relief through their tax returns.
It’s also possible to carry forward any unused annual allowance from the previous three tax years – 2011/12, 2012/13 and 2013/14. You need to have been a member of a registered pension scheme in the tax year to use this carry forward facility.
You can only have tax relief on pension contributions up to 100% of your earnings in the current tax year. If you have no earnings, you can still receive basic rate tax relief on contributions up to £2,880.
5 – Hang on to your child benefit
Child benefit gets clawed back if you or your partner has taxable income over £50,000. The high income child benefit charge is then applied at 1% of the benefit for every £100 of income over £50,000.
Once your income reaches £60,000, the child benefit is gone. Individual income rather than total household income is the thing to consider.
If your earnings are around the level of £50,000, you can hang onto your child benefit by reducing your adjusted net income by making pension contributions, sacrificing salary in return for tax-free benefits such as childcare vouchers, or even making donations to charities through Gift Aid.
These are just five tips to consider as we approach another end of the tax year.
What steps will you be taking between now and the end of the tax year to stop wasting tax?
