As if January wasn’t bad enough. The weather’s turned cold, Brexit would almost be comical if it wasn’t so serious and then you have to do your taxes.
So to try and cheer myself up I’ve put together a handy guide of different options you’ve got to reduce your tax bill. Now I appreciate these will be too late for the recent tax return, but if you’re looking to reduce the 18/19 tax bill, then you’ve got until 5th April to utilise one or all of these. Just a note – I am not a qualified accountant and this is not tax advice… but really, it’s just common sense.
1 – Personal pension contributions.
The simplest and best way to reduce that tax bill. 2 things to be aware of – any money that goes into your pension can’t be touched until you’re 55 plus you’ve got an allowance of £40,000 (or your earned income in certain cases). Caveat: If you earn over £150,000 then this £40,000 is reduced – call me for a further explanation.
Basically HMRC count your taxable income as your gross earnings minus your pension contributions, Higher pension contributions equals lower taxable income equals lower tax to be paid.
Who this suits: If you’re approaching or above 50, then this really should be your main focus of savings as the benefit of tax relief far outweighs the fact that the funds cannot be accessed until you’re 55.
1a) – Pension contributions for people who earn between £100,000 – £123,700 – if this is you, then please take note:
A quirk of the tax system means anyone who earns around this figure, potentially ends up paying 60% tax for this segment of their earnings because of the reduction in your personal allowance. If you fit into this category, it’s even more beneficial to make extra contributions as they will attract effectively 60% tax relief.
2 – Use tax-effective investments such as VCTs and EISs.
These investment schemes are designed by the Government to give you tax relief for investing in smaller British companies. By nature they are higher risk, as they’re smaller companies, and you need to have a longer investing time horizon – as you’re money is tied up for normally 5 years. However the tax relief is potentially fantastic and you can get exposure to some really interesting companies doing fascinating things. You get 30% relief on your initial investment (on VCT and EIS) and then can claim back the amount that you potentially lose. i.e. If you invest £20,000 you will get £6,000 off your income tax bill for that year. VCTs these days are more diversified and generally aim to produce a consistent tax-free return of ~5%. EIS and SEIS are more at the sharper end and is really investing in start-ups with all the risks and potential returns that come with that.
Who this suits: These are potentially suitable for higher earners who have their pension annual allowance limited and an appetite for investing in smaller, riskier companies.
3 – Use the marriage tax allowance.
Not everyone is fortunate enough to earn that level of income, but if you’re married or in a civil partnership, and one of you is a non-taxpayer (earns under £11,850) and the other is a basic rate payer (earns under £43,350), then you can transfer some of the non-taxpayer’s annual allowance across to the taxpayer. Even better this can be back-dated to 2015 and still counts if you’re partner is deceased. This is potentially worth £900 if you fall into this category.
Who this suits: Married couples who fit into the earnings rules stated above.
4 – Remember all those charity donations.
For all those marathons, bike events, cake days etc throughout the year, the money you’ve donated can be claimed back – even if you’ve ticked Gift Aid for some. If you haven’t ticked gift aid you can claim the whole amount back. If you have ticked Gift Aid and are a higher-rate tax-payer you can still claim the difference between your rate and the basic rate.
Who this suits: Everyone – just find those donation receipts.
5 – Switching rental income into name of lower earning of a married couple.
If you own an investment property with your spouse then potentially more of the rental income can be channeled through the lower earning partner. You will need to complete a certain form (Form 17) for this, but it’s possible and potentially very tax-effective if one person doesn’t work.
Who this suits: Landlords who are married and have different tax rates.
Hopefully you’ll find at least one of these helpful and can put into practice. If you’ve got any questions, please drop me a line and I’ll be happy to help.