If you’ve ever wanted to understand how you can reduce tax before tax year-end, then you’re reading the right article. That’s because you’re about to discover my simple methods for you to generate the most savings and get your finances in order. And the good news is that this method works even if you are a beginner or a tax planning pro just refreshing your knowledge to reduce tax. Read on… Step 1: it covers all “The Tax Efficient Savings Options You Can’t afford To Miss Out On”
Many people who’re new to tax planning don’t even realise that they need to do this step before they can reduce tax. And that’s why a lot of people who try to build wealth end up failing – they’re simply missing this crucial step. So, the first thing you need to do is take advantage of ‘Free Money’ also known as tax free savings accounts commonly known as ISA’s and Tax Relief investments such as pension.
- The first tip is to identify is where you are saving your money and if you have the right accounts. There are plenty opportunities that is well worth exploring
- The second tip is to challenge yourself to save more so you can take advantage of further tax benefits whether it be in an ISA or a Pension.
- The third is don’t get caught out by tax traps, take time to understand any tax that applies to you. For example, if you wish to buy or sell a property you should consider the tax involved. Start by factoring the cost and then see where you can legally reduce the tax to avoid paying more that you should.
When I first started tax planning, I was unaware of how many mistakes can be made and how easy things can go wrong. Now, I’ve helped hundreds of others overcome these challenges and I see a lot of people have a tendency to make the same mistakes. So, let me share with you the top three mistakes and how to avoid them:
- Procrastination-This is by far the most common mistake and we can all be guilty of leaving things to the last minute, but this can lead to you missing out on favourable tax savings. By starting your tax-end planning at the start of the year you can ensure you take advantage of all the opportunities available.
- Failure to maximise current situation – Exploring how you can cut back on tax does not always mean major changes. Sometimes minimal changes to your current circumstance can create optimal savings.
- Signing up For Inaccurate Tax Planning– There is no quick fix that will solve all your tax planning problems overnight and if you come across any options like this you can be certain it’s inaccurate, ineffective and possibly illegal. Tax-Planning is a consistent process and should be explored at least annually to be effective.
Tax-year end planning can seem overwhelming and complex, and I still remember the first time exploring and I felt the exactly same. However, you will be pleased to know it’s not as complex as it seems, and you should only pay attention to tips and strategies you can take advantage of in within the year. In other works, “don’t bite off more than you can chew” which is the common saying for keep it simple. This breakdown will help you explore all the main points you need to know to help you take advantage of your tax -year end opportunities to generate savings and reduce tax.
Please note the information provided is generic and does not provide financial advice. Should you need advice speak to your financial adviser or accountant regarding the following.
TAX EFFIECENT OPTIONS YOU CAN’T AFFORD TO MISS OUT ON – ALLOWANCES
ISA are tax-free savings accounts that are free of income and capital gains tax.) Here are a few different types of ISA’s you can consider here are some of the most common.
- Cash ISA: £20,000 annual allowance.
- Stocks & Shares ISA: £20,000 annual allowance.
- Junior ISA (available for children aged 0-18): £9,000 annual allowance.
- Help to Buy ISA: £200 per month allowance along with an eligible* 25% bonus. This means you can contribute £2,400 per year and receive a £600 bonus meaning you have a total contribution of £3,000. You can no longer open an HTB and the above is only applicable to those who already hold one. (other restrictions may apply)
- Lifetime ISA (LISA): £4,000 annual allowance along with an eligible* 25% bonus. This means if you save £4,000 you receive £1,000 bonus which totals to a contribution of £5,000. Bonus applies to those saving for first home or retirement (age 60 and above) and contribution stop at 50.
*eligibility criteria applies and if rules are not adhered to you may forfeit your bonus
Pensions are savings pot designed to meet your retirement needs. You are eligible for tax relief (a government initiate to reduce tax)on contributions up to the annual allowance.
- £40,000 annual allowance (subject to reduction on income above certain level)
- 8% auto enrolment – 3% employer 4% employee and 1% gov
- If you are not working or a nil rate taxpayer, you can contribute £3,600 gross allowance which equates to £2,880 after tax relief.
Venture Capital Trusts (VCT), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) can be great ways to invest and receive huge tax relief. However, they are deemed as high risk and should only be explored once you have maximised other options such as ISA’s and Pension EIS and SEIS huge income tax relief.
Is the interest you can earn on savings
- £1000 allowance for basic rate taxpayers
- £500 allowance for higher rate tax payers
- No allowance for additional rate tax payers
The allowance you receive on distribution of profits by a limited corporation to its shareholders)
- £2,000 dividend allowance regardless of tax band
EXPLORING TAX AND REDUCING STRATERGIES
- personal allowance of £12,500 (reduced those who earn above £100K)
You have opportunities to defer income to next tax year, pass income to spouse, make gifts to charity (gift Aid) and one of the common ones contribute to pension. If you are employed it’s also worth reviewing your tax code to ensure it is correct. In addition, if you are self-employed make use of business expenses such as pension contributions. If you are married, you have the can transfer 10% of their personal allowance to spouse.
CAPITAL GAINS TAX (CGT)
Tax you pay on profits when you gift, transfer or sell. Excludes your main residence.
- £12,300 (£6,150 Trusts) allowance fixed until 2026
- Any gains above are subject to 10% tax or (20%-28% property) depending on your tax band.
You have opportunities to sell stocks and buy them back know as bed & breakfast. It is worthwhile declaring losses if you have them as they can be used to offset gain in future year. You can transfer assets between spouses or civil partners tax-free. You should speak with your financial adviser or accountant if wish to explore these options.
INHERITANCE TAX (IHT)
Tax applicable on estate upon death according to ££5.2m was paid out in IHT.
- £325,000 nil rate band. Married couples have a combined £650,000
You have opportunities to make regular gift tax-free for example you can gift £3000 annually and the previous year if unused. So, you could gift a total of £6,000 if no gifts have been made in the last two years. You can also gift £250 per person tax-free. They may sound like small amounts but if you use them consecutively, they will surely play a vital role in reducing your estate. You also have the opportunity to gift from normal regular expenditure which is tax-free. It’s worth making a note of any gifts made for tax purposes. You should also ensure you have an up-to-date Will in place to take advantage of the nil rate residency band which provides an additional £175,000 (per person) to the nil rate band if you plan on; leaving your main residence to you children.
OTHER THINGS TO CONSIDER
Company Accounts – Corporation Tax still 19% for next year
Child Benefits – Eligible for those with total household income below £50,000.
Property- Landlords can only claim back mortgage interest up to BRT. Those renting a room can claim up to £7,500 tax-free under the rent a room allowance.
COVID – Bounce Back Loan
- 5% corporation tax charged if loan was used for personal use and has not been repaid within 9 months of your company’s yearend passing. This means if you borrowed £50,000 you could end up paying a shocking £16,250 in tax – Speak to your accountant if you have concerns.
- Can now extend to 18 months (from 12 months)
- Interest will kick in from 12 months (31st March)
- Can top-up if you didn’t claim full amount up to 25% of turnover
- Loan period can be extended to a 10-year period
If you want to find out further details on how you make maximise your 2021 tax year or plan ahead for future years don’t hesitate to book a consultation here.
Look out for our next personal finance blog and SUBSCRIBE for updates and new content notifications and receive a FREE copy of Your Financial Checklist Workbook.