Six end-of-tax year strategies to avoid ‘sneaky | European Markets

As the top of the tax yr attracts nearer, specialists are urging taxpayers to think about a vary of tax-efficient methods to make some financial savings.

Sarah Coles, head of personal finance at Hargreaves Lansdown, warns of the “sneaky traps” awaiting higher-rate taxpayers.

Ms Coles mentioned: “The taxman has set an array of sneaky traps for millions of higher-rate taxpayers. They’ll be painfully aware of the income tax trap, which has plunged almost two million more people into paying higher-rate tax since April 2021. However, there are other more stealthy traps ready to catch them and empty their pockets.”

Frozen tax thresholds and diminishing allowances are pushing more people into greater tax brackets. For instance, the higher-rate tax threshold has been frozen at £50,270 since April 2021, whilst wages have risen 22% since then. If the brink had saved tempo with wage inflation, it could now be £61,329.

Regardless of these challenges, there are efficient methods to cut back your tax invoice. Ms Coles shared six methods to think about earlier than the tax yr ends on April 5.

Pay into a pension

Higher-rate taxpayers can claim tax relief at their highest marginal rate, making pension contributions a powerful way to reduce taxable income.

You can pay up to £60,000 into your pension this tax year and carry forward unused allowances from the previous three years.

This is especially valuable as the higher-rate tax threshold remains frozen at £50,270, meaning anyone earning above this pays 40% income tax. Reducing taxable income through pensions can ensure you stay below the threshold or minimise the impact of rising wages on your tax bill.

Escape the High-Income Child Benefit Charge

The high-income child benefit charge kicks in at £60,000. If your income (or your partner’s) has exceeded the brink, and also you obtain baby benefit, you’ll need to repay no less than some of it by way of self-assessment. When you earn £80,000, you need to repay all of it.

Contributing to your pension can help decrease your adjusted web income, doubtlessly holding it beneath the £60,000 threshold and preserving more of the kid benefit.

Nevertheless, Ms Coles emphasised that for these not working, it’s nonetheless essential to assert baby benefit if eligible – even if you happen to waive the funds – because it secures Nationwide Insurance credit in the direction of your state pension.

Use pensions to remain beneath the £100,000 threshold

Incomes over £100,000 triggers a tapering of your personal allowance – cut by £1 for each £2 above this degree. By incomes £125,140, you lose your whole personal allowance, leading to an “effective” tax fee of 60%, in response to Ms Coles.

This threshold has remained the identical because it was launched in 2010, although wages have risen by 60%. If it had risen with wages, Ms Coles mentioned it might now be £160,000.

By paying into your pension, you’ll be able to cut back your income beneath £100,000 and restore your full personal allowance, saving vital tax. For instance, in case your income is £101,000, paying £1,000 into a pension brings your income down to £100,000, saving you £400 in tax aid and an extra £200 in preserved personal allowance.

This strategy additionally helps mother and father retain eligibility for tax-free childcare, price up to £2,000 yearly, which is misplaced as soon as earnings exceed £100,000.

Maximise your capital positive aspects tax allowance

Capital positive aspects tax (CGT) thresholds have been sharply diminished, falling to £3,000 within the present tax yr from £12,300 in 2022/23. Good points above this degree are taxed at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.

You probably have investments outdoors an Particular person Financial savings Account (ISA), Ms Coles instructed contemplating promoting property to grasp positive aspects up to the allowance. Utilizing the Mattress and ISA course of, the tax skilled mentioned you’ll be able to reinvest the proceeds into an ISA, sheltering future growth from CGT. You may as well offset losses towards positive aspects and carry ahead unused losses for future use.

Shelter income-producing property in ISAs

Dividend and financial savings tax guidelines have change into more and more burdensome. The dividend tax allowance has fallen to £500 this yr, down from £5,000 in 2017/18, whereas the personal financial savings allowance stays at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.

Ms Coles really helpful transferring income-producing investments into a shares and shares ISA, which permits taxpayers to protect their dividends from tax. Greater-rate taxpayers face a dividend tax of 33.75%, whereas basic-rate taxpayers pay 8.75%. Through the use of an ISA, any dividends acquired are tax-free, up to the £20,000 annual contribution restrict.

Equally, money ISAs shield your financial savings curiosity from tax, with the identical £20,000 contribution restrict.

Plan as a couple

Married {couples} and civil companions have a number of alternatives to cut back their tax burden. Ms Coles mentioned: “If you’re married or in a civil partnership and your partner pays a lower tax rate, you can transfer income-producing assets into their name. It means you can both take advantage of your tax allowances.”

Eligible {couples} also can declare the Marriage Allowance, which lets a lower-earning accomplice switch up to £1,260 of their unused personal allowance to a higher-earning accomplice, saving up to £252 yearly.

{Couples} also needs to think about utilising tax-efficient automobiles like ISAs, pensions, and Junior ISAs for his or her youngsters to maximise tax financial savings.

This text shouldn’t be supposed as financial advice. Readers ought to seek the advice of a certified financial adviser for steering tailor-made to their particular person circumstances.