Keeping an eye on the tax you pay is good financial management, but keeping up with constantly changing rules is a tough call even for professionals.
Like the old cliché says, tax is inevitable.
But the good news is you can take manipulate what you pay and when if you play the tax man’s game.
It’s an idea to monitor you taxes throughout the year, but the key time to act is between new year and April 5 because you can change your tax status by taking action up to midnight on April 5, but the tax you pay for the year is locked just a minute later.
So what do you look for?
Date to remember
Once the tax year clicks over on April 5, savers and investors lose their annual allowances, such as tax relief on pension contributions, ISA limits or breaks on investing in the Seed Enterprise Investment Scheme (SEIS).
Other reliefs and allowances go by the board, too. Like the marriage allowance, inheritance tax gifts and the capital gains tax annual exempt amount.
Don’t think HM Revenue & Customs will tell you want you can claim. The tax man won’t and will idly let the years go past with you overpaying unless you address the issue on a self-assessment return.
Life is even more complicated with carry-back provisions that allow you to salt away some extra cash in certain savings and investments.
Besides the marriage allowance for moving the unused income tax personal allowances between couples, getting hitched also helps with capital gains tax.
The inter-spousal exemption allows couples to switch assets like property, shares or collectibles between themselves without triggering any tax.
Tax planning opportunities for this exemption exist where one spouse pays higher rate tax (40% or above), while the other is a basic rate taxpayer (20%).
To help, here’s a list of tax planning topics to consider.
Income Tax savings
Four of the simplest to claim income tax savings:
Marriage Allowance – Saves up to £250 income tax in any year if one partner transfers £1,250 of their personal income tax allowance to the other, including civil partners.
Savings Starting Rate Band – Not an option for many savers as annual income must be below £17,500 for adding the band to the personal allowance to stretch the nil rate band. Every pound of income above the personal allowance decreases the Savings Starting Rate Band by the same amount.
Personal Savings Allowance – For basic rate taxpayers, the first £1,000 of savings income is untaxed, falling to £500 for a higher rate taxpayer. Additional rate taxpayers (45%) receive no relief
Savings generally means interest but can extend to chargeable gains arising from single life premium bonds
Dividend Allowance – Each year, the first £2,000 of dividends received are tax-free
Capital Gains Tax savings
Capital Gains Tax (CGT) planning comes with host of tax saving opportunities, two to consider are:
Annual exemption – Like income tax, CGT comes with a personal allowance each year called the annual exemption, which is a tax-free band for disposing of assets
Loss relief – CGT losses in one year are offset against gains in the same year or carried forward to reduce gains in future years.
Tax efficient investments
To encourage people to save, the government offers several tax breaks for investors willing to take a risk:
Seed Enterprise Investment Scheme (SEIS) – If you have up to £100,000 to invest, SEIS rewards business angels willing to stake money against start-ups an income tax refund up to 50% of the value of the investment plus CGT reliefs.
The Enterprise Investment Scheme does the same as SEIS but on a larger scale – with investments of up to £1.5 million for ‘knowledge’ companies accompanied by a 30% income tax refund and CGT reliefs.
Venture Capital Trusts are similar set-ups with slightly different tax breaks.
Other ways to pay less tax
Pensions are the first place to look to maximise tax relief on contributions, but beware the rules are tipped to change in Budget 2020.
For those earning less than £150,000 a year, pensions are the number one saving choice.
ISAs are also valuable places to stash up to £20,000 a year in a tax efficient way.
Then come SEIS and other investments, like EIS and Venture Capital Trusts.
A key factor is scheduling events that trigger tax.
For example, selling a block of share in two transactions before and after April 5 means you can offset two annual exemptions.