Six ways to beat the taxman before April deadline - from pensions to savings
The end of the current tax year is fast approaching - but there are things you can do right now to save yourself money.
The tax year doesn’t run from January to December - instead, it always starts on April 6 and ends on April 5 the following year. This means the last day of the current tax year is April 5.
This is typically the final date to use up your tax allowances, which can affect everything from your savings to your pension, so it is important to know what you’re entitled to. Laura Suter, director of personal finance at AJ Bell, has highlighted ten things you need to be aware of.
Use up your tax allowances
Each tax year, you have an ISA allowance worth £20,000. This can be split between different types of ISAs - for example, cash ISAs, stocks and shares ISAs and Lifetime ISAs. You can only put away £4,000 each tax year into a Lifetime ISA, or £9,000 into a Junior ISA.
If you're saving into a Junior ISA for your child, this won't affect your own allowance. The interest earned in an ISA account is tax-free - although do keep in mind you can already earn £1,000 in interest each tax year already if you're a basic rate 20% taxpayer, due to the personal savings allowance. Laura said: “ISA allowances are ‘use it or lose it’, so if you miss the deadline to top-up your account you won’t get that allowance back.”
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Most people can also put up to £60,000 in their pension each tax year, or 100% of earnings if that is lower. This is known as your annual allowance. Laura continued: “This limit isn’t as immediate, as you can carry forward any un-used allowances for up to three years, but it’s still worth considering. Just be aware, anyone with a very high income or who has already started to take taxable income from their pension will have a restricted annual pension limit of £10,000.”
Protect your savings from tax
As we've mentioned above, basic rate 20% taxpayers can earn up to £1,000 in savings interest each year without having to pay tax. This doesn't include any money you have in ISA accounts, which will always be tax-free.
For higher 40% rate taxpayers, the personal savings allowance is £500. Additional 45% rate taxpayers receive no tax break at all on savings. It is important to be aware of potential tax to pay on savings, due to rates having improved dramatically over the last year - meaning more people are getting better returns on their money.
Laura said: “Almost 2.75 million people in the UK are set to pay tax on their cash savings interest in 2023-24, with around 1 in 20 basic-rate payers paying tax on their cash interest, rising to 1 in 6 higher rate payers and around half of additional rate payers, based on AJ Bell estimates.
“The easy way to protect your cash from the taxman is to use a cash ISA, assuming you have allowance remaining. An alternative is to share your savings between your partner, if they pay income tax at a lower rate or have ISA allowance remaining.“
Beat the Capital Gains cut
The Capital Gains tax-free allowance is being cut from £6,000 to £3,000 from the next tax year. It has already been reduced from £12,300. Capital Gains is a tax on the profit you make when you sell or give away an asset that has increased in value.
You pay Capital Gains on most valuables and personal possessions, not including your car. You can also pay it on any property that isn't your main home, your main home if you've let it out or used it for business, or investments held outside an ISA or pension above the tax-free limit.
Laura said: “Gains are added to income and if they fall in the basic-rate tax band are taxed at 10%, while if they fall in the higher-rate tax band are taxed at 20% (an additional 8% is added to the tax rate if the gains are from a second property). You can use something called ‘Bed and ISA’ to realise gains and then funnel investments into an ISA and protect them from tax.“
Maximise your free money
If you've got a Lifetime ISA account, you can deposit up to £4,000 every tax year and get £1,000 free from the Government to put toward your first home or retirement. Make sure you use up this allowance before April 6.
You should also check if you're maximising your pension savings and other tax breaks. Under current tax rules, you can get a 20% tax relief on your private pension contributions. This means it only costs £80 to pay £100 into a pension for basic rate taxpayers and £60 to pay £100 for higher rate taxpayers.
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Laura said: “Whether it’s claiming tax breaks, claiming benefits you’re entitled to, getting tax relief you’re due or getting a government bonus on your Lifetime ISA – there are lots of ways to get free money from the government that you might be missing out on.
“You should also check that you’re claiming any government tax breaks that you’re eligible for, such as the marriage allowance, child benefit or tax-free childcare, which gives a 20% top-up to money you use for childcare.”
Prepare for the dividend tax raid
This is the second year in a row that the amount you can earn before paying dividend tax is cut – from the current £1,000 to just £500 from April 6. As a result of the cut, an extra 1,115,000 people will have to pay dividend tax from April 2024, according to AJ Bell.
Dividend tax applies to income-generating investments outside an ISA or pension. Laura explained: “The tax crackdown means the government is expected to take £17.6 billion in dividend tax from investors and company directors in the current tax year – almost £2 billion more than the previous year.
“You can use the bed and ISA process to move assets into an ISA, but if you have too many investments to move them all in one tax year you should prioritise the ones paying the highest amount of dividends.”
Use your gifting allowances
If you're worried about Inheritance Tax, it is worth knowing what allowances you have in place. Everyone can give away up to £3,000 a year without it being considered for IHT, but you can also carry this forward if you didn’t use the allowance last year. This limit is per individual, so a couple can double it.
Laura said: “On top of that there are extra allowances if certain people get married: £5,000 for a child getting married, £2,500 for a grandchild or great-grandchild and £1,000 for anyone else. You can also gift up to £250 per person each year free of IHT. These gifts can be cash, investments, jewellery, property or other assets.“
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