The UK tax code is now more than 20,000 pages long, comprising over 1,000 tax reliefs and exemptions. At around 10 million words, it’s 12 times the length of the Bible.
It’s natural to be bewildered by tax planning, but it doesn’t have to be. When dealing with such a large body of rules and regulation, you simply need to know where to look.
We’ve just started a new UK tax year. That means there’s no better time to begin your tax allowance planning for 2018/19, with savings to be had for those who think ahead.
Here’s our guide to five key tax breaks you should consider over the next 12 months.
1. Maximise your ISA allowance
ISAs are a simple way to shelter your savings from taxes, allowing you to save up to £20,000-a-year for 2018/19.
This is what’s called the ISA allowance. You can put the full £20,000 into one ISA (like an investment ISA), or you can split it into different accounts.
Over time, this should mean you’ll accrue a large savings pot with many tax benefits. With an ISA, savers are charged no tax on profits, no capital gains tax, no tax on interest earned on bonds, and no tax on dividends.
Which ISA you choose depends on your appetite for risk. Cash ISAs and lifetime ISAs are straightforward, and you don’t pay tax on the interest you accrue.
The financial benefits of these first options could be substantially less than, for instance, an innovative finance ISA, which allows investors to lend to borrowers through regulated funding platforms, paying no tax on interest accrued.
The disadvantage of non-cash and non-lifetime ISAs? Greater risk for the investor. Which will you choose?
Full ISA Guide – Save without paying tax (via Money Saving Expert)
2. Review your pension arrangements
Pension schemes are another tax-efficient way to invest savings. The amount you can contribute to your pension annually while still receiving tax relief is capped, however.
The annual allowance, as it’s called, sits at £40,000-a-year. This applies across all the pension schemes you belong to. It’s not a ‘per scheme’ limit and includes all the contributions made by you and your employer.
If you exceed this limit, you won’t receive any tax relief, and you’ll pay an ‘annual allowance charge’ on any contributions exceeding £40,000. The excess is added to your taxable income for the year.
3. Beat the Dividend Allowance cut
The Dividend Allowance means you don’t have to pay tax on the first £2,000 of your dividend income. It is available to all taxpayers, no matter what amount of income you earn.
The allowance was reduced from £5,000 in April this year, and will mean a higher tax bill for directors of small businesses, investors, and others who earn dividends outside of stocks and shares ISAs.
However, holding dividend producing investments within a stocks and shares ISA can help to lessen the impact of these changes.
Up to £20,000 can be invested in a stocks and shares ISA this tax year by each individual aged 18 and above, and all income and gains are free of tax.
4. Think charitably
Charitable contributions mean a reduction in the amount of tax you pay because each is subject to tax relief.
To take advantage, you’ll need to keep a record of how much you’ve given to charity throughout the tax year. You can donate multiple ways, with cash being the most common. This way, higher-rate taxpayers can claim effective tax relief of 25%.
An often overlooked alternative to cash donation is offering shares, land or buildings to registered charities. Gifting assets directly – rather than selling first and then offering the sum raised – will incur no capital gains tax. What’s more, you can claim a deduction against your income for the value of the assets donated.
For a higher rate taxpayer, this means an effective income tax relief of 40%.
Tax implications on charitable donations (via Taxation)
5. Give to your family
The standard inheritance tax rate is 40% of anything over the £325,000 threshold. You might also reduce your tax bill by gifting money to your loved ones.
As long as you make the gift more than seven years before death, doing so will prove tax-free. The relief is tapered, too. Gifts made three to seven years before your death are taxed on a sliding scale.
There’s also a gift allowance of £3,000 per year. This is the maximum you can gift tax-free to your heirs while you’re still alive.
Gifts and exemptions from inheritance tax (via Money Advice Service)
The UK tax system is complex and ever-changing. But for individuals who plan ahead, there’s plenty of tax efficiency savings to benefit from.
It’s never too early to start. Tax efficiency and maximising the tax breaks on offer is vital to your family’s financial future. And remember: while some tax breaks can be carried over from year-to-year, others – like your ISA allowance – aren’t transferable. To make the most of them, consider your tax strategy today.