The tax year end is right around the corner and year-end tax planning can be started. This also means that the tax allowances get refreshed and any unused tax allowances will be lost. The end of a tax year and the beginning of another is a great opportunity to save money. This period helps you reduce the amount you pay in tax.
This article is about the various tax allowances one can take advantage of before the tax year ends. This also helps you keep track of the taxes you pay. Read the blog below and make sure you are not paying more tax than necessary by taking advantage of all your annual allowances.
Here’s what you need to know:
The importance of tax planning:
Tax planning is the process of analysing your financial situation in order to help minimize your tax liability. It helps you pay less and earn more. This is quite efficient as at the end of the tax year, as it can result in hundreds or thousands of pounds in your pocket, depending on your situation and if you have used any of your allowances. Tax planning is an essential part of any financial plan for individuals, families or businesses.
What are the main taxes?
Before understanding the allowances let's look at the main taxes that exist:
Income tax: Income tax is paid at 0% to 45% depending on your income. This is also payable on savings, dividend and interest.
Capital gains tax: This type of tax is paid at 10% to 28% on investment gains (profits). This is also payable when you sell a second property.
Inheritance tax- The inheritance tax is paid at 40% on your death.
Tax allowances- everything you need to know!
Make the most of ISA Allowance
ISA allowance is one of the most generous tax breaks offered by the UK government. Every citizen of United Kingdom has an ISA allowance of £20,000 per year. ISAs are efficient tax savings and investments accounts. They can be used to save cash or invest in stocks and shares. You pay no income tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax.
A better option in the case of ISA allowance is to invest in stocks and shares. This way you are protected against dividend tax and Capital gains tax. However most people stick their cash in ISAs.
Consider Paying more into pension
Adding money to a pension can act as one of the most tax efficient ways to save for retirement. The general rule for a UK resident is to save ten times your average salary by the age of retirement. Up to the age of 75, you can contribute up to 100% of earnings or £40,000 into a pension. However, high earners have a few restrictions such as tapered pension annual allowance.
In the event of having no income, you can still contribute £2,880 per year to a pension. Contributions can be made to your employer’s pension scheme, and this can be made from your gross pay, before any tax has been charged. The government would top your pension with tax relief, giving you a free bonus for saving for retirement.
Divide your Assets
If you are married or in a civil partnership, it's worth being aware of the special rules around gifting your assets. You don’t pay capital gains tax on assets you give or sell to your spouse or civil partner.
In marriage tax allowance, you can transfer up to 10% of your personal allowance to your spouse or civil partner. This is just two of the four main ways married couples can reduce their tax bill.
Passing on the wealth to next generation
Many of us want to leave a legacy or secure our family’s financial future and this can come to your tax advantage. Estate planning can help you save a huge amount of tax. Inheritance tax is usually charged at 40% of anything above the nil rate band. Acting early would help, this would also mean more of your money would go to your beneficiaries. There are many ways to manage, reduce or eliminate the inheritance tax which would include Making gifts, using other assets to provide a retirement income and passing on to the pension, taking a life insurance policy to cover the tax bill, using tax-efficient investments to benefit from business relief.
Claim Tax-Free Child Care
The government offers a tax-free childcare scheme which offers up to £2,000 a year per child which would contribute to the childcare costs. These childcare costs would also include nursery, childminder and wraparound care. Around 1.3 million families stand eligible for the childcare benefits and 800,000 aren't currently using these benefits. Under this scheme you can claim back 25% of your childcare costs. To avail this, you are required to set up an online account, which is required to manage the payments to your childcare provider. Under the scheme, for every £8 deposited, the government would pay £2, until the value of £500 every three months or £1,000 if the child is disabled.
Speak to a Financial Adviser
You might be doing your own tax planning most of the time but when it comes to navigating complex areas of tax planning you might find that you would need some extra help. Our qualified, sector specific chartered accountants at PKPI would be the right choice for all you tax planning issues. Maximize your savings by paying less tax, GET IN TOUCH TODAY!