Being tax-smart means knowing the basics about how tax affects your life and money.
Here are 10 ways to reduce your tax bill, which could make your money go further for you and your loved ones.
You’re entitled to receive some interest on your savings tax-free every year, depending on your income tax band. For non-taxpayers or basic rate taxpayers, you’re allowed up to £1,000 per year; for higher rate taxpayers you get £500. If you have savings with a spouse or partner, you can each use your allowances against your joint savings.
If you are married, you might be able to take advantage of the marriage tax allowance. It allows one-half of a couple who earns less than the income tax threshold (£12,570) to transfer up to £1,260 to their higher-earning spouse (who must be a basic rate taxpayer).
An ISA account allows you to save or invest up to £20,000 tax free annually, whether it’s in a cash ISA or stocks and shares ISA – which also comes with the benefit of being exempt from dividend tax and capital gains tax on all growth.
You are allowed to receive up to £2,000 a year in dividends, tax-free. This allowance can be particularly useful if you own shares or you’re a company owner or director.
Profits (or ‘gains’) you make on the sale or disposal of an asset (like a property where it’s not the main home, investments and shares not in an ISA or even personal possessions worth more than £6,000 (apart from your car) are exempt from tax up to the annual allowance of £12,300. For married couples or those in civil partnerships who own joint assets, the allowance is doubled – to £24,600.
Your pension allowance annually is £40,000, although it can be lower for higher earners and where pension savings have been flexibly accessed. Any contributions you (or your employer) make receive tax relief from the government (based on your income tax band) of 20% or more – and the money in your pension pot will grow tax free.
If you don’t use up your annual pension allowance, you can ‘carry forward’ the previous three years’ worth of unused allowances providing you are still registered with the pension and have earned in the current tax year the amount you (or your employer) would like to contribute.
You can donate to charity tax free and claim back the tax on your donation through gift aid. If you are a higher or additional income taxpayer, you can also claim back the difference to the basic rate on your gift aid donations. Just remember to keep hold of all records of your donations to claim tax relief when the time comes to submit your tax return.
Gifting comes with the benefit of being exempt from inheritance tax, for an annual gift amount of £3,000. Other tax-exempt gifts include money toward a wedding or grandchild’s education. No inheritance tax is due if you live for seven years after making the gift to someone who is not your spouse (for example, gifting your children a property).
This one is important because your tax code tells HMRC how much of your salary they will collect. It’s a good idea to check your tax code each time you change jobs or at the start of the tax year. Being on the wrong code could mean you’ve overpaid tax and are due a refund. These are just some of the ways you can ensure you’re making the most of your money and not paying more tax than is necessary. Speak to your adviser to learn more about your money, estate, and taxes. Please note that Openwork advisers are not able to provide specific tax advice.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
For specific tax advice please speak to an accountant or tax specialist.