Reviewing your tax situation every now and then is crucial in order to manage your wealth and income you’ve worked for.
With the constant changes, we thought it would be helpful to share some insights into how to best plan personal tax, so it’s over to Rebecca Moseley, Tax Manager, with some tips for you to consider when it comes to personal tax planning, that hopefully will make the T word less scary.
Let’s hear from Rebecca…
Personal tax can be complicated. With life changing circumstances like marriage, children, retirement and increased legislation, structuring your personal affairs can become a bit of a minefield.
But have you ever taken a deeper dive into how to plan your tax? Below are some ideas which can help you to organise your tax better.
1. Pay into your Pension:
One of the biggest advantages of pension saving is that paying into it helps to reduce tax. The government encourages you to save for retirement, so money that you pay into a pension is eligible for tax relief. This provides an instant boost to your savings, and helps the funds to grow faster than other options of investment.
The annual allowance for pension saving is £40,000, but it is restricted if your annual taxable earnings and pension savings are more than £240,000. Contributions within the annual allowance will benefit from tax relief at the taxpayer’s highest marginal rate of tax.
2. Make sure you’re on the right tax code:
Although it may seem obvious, your tax code is a great way to tax plan, as you can see how much tax HMRC takes from your salary. Your code can always be found on your payslip, and it’s imperative to check your tax code after changing jobs and after each tax year, to ensure it is correct for your situation, and that you aren’t being taxed more than necessary.
If your tax code is wrong, you may be entitled to pay less tax for a few months, or even receive a refund for paying more than needed in previous years.
3. Save for children:
If you have children and are looking to invest for their future, starting early whilst they’re young will help you to save on tax in the long run. Putting a sum of money aside each month over the course of several years can turn into significant savings that can be used for large costs such as a deposit for a house, a wedding or university.
There are a few ways that you can save for your children’s future…
A child’s parent or legal guardian can open a Junior ISA on their behalf. The money in the account belongs to the child, but they cannot withdraw until they are 18 apart from exceptional circumstances. The limit for a Junior ISA is currently £9,000 per tax year. If more than this is put into a Junior ISA account, the excess is held in a savings account for the child- it cannot return to the parent/guardian who gifted the funds.
The biggest advantage of a Junior ISA is that your child/children won’t need to pay tax on the interest they earn on their savings- and you won’t have to either!
Setting up a trust for your child is another way to invest on behalf of your child, and if they need to access the funds before they turn 18, for example for school fees then this could be a more suited option. Amounts paid into a trust have no limit, and as long as you survive seven years after making a payment into a bare trust, there is no IHT (Inheritance Tax).
If bare trusts pay income to the child before they are 18, the child’s income and CGT allowances mean that the withdrawals are tax-free, if the amount drawn falls within their annual limits.
4. Put money into an ISA:
I mentioned above a Junior ISA, but what about your ISA? An ISA (Individual Saving account) is a fund that you can contribute at your own pace. Again, it is a tax-efficient way to put away funds for a later date, as income and advances created from investments within the ISA are in essence tax-free.
5. Use capital gains:
When you sell an asset such as a property, land, investment or business shares, if they are sold for more than what you originally paid, there is a potential liability for capital gains tax.
It’s important to make sure you’re not paying Capital Gains Tax (CGT) unnecessarily. CGT is calculated based on the tax year and your total income. If you are already a home owner, you won’t need to pay tax on your main home, but if you have any other residential properties you may become more liable to CGT.
You might be able to reduce your tax bill by deducting costs that are related to the assets you are looking to sell. For example, you can deduct the costs of any renovations if you are selling one of your properties.
It’s important to note that the from 1st April 2023, capital gains tax allowance will be halved. It will be reduced from £12,300 to £6,000, and halve again to £3,000 from April 2024.
We hope some of Rebecca’s tips for personal tax planning have helped, but if you are looking for more guidance on how to plan for personal tax, you can speak to one of our friendly Senior Tax Advisors by emailing firstname.lastname@example.org.