Most of us know that tax can be a real pain in the pocket – particularly if you’ve recently filled out a tax return in the run up to the January 31 self-assessment deadline.
The good news is that there are plenty of things you can do to legitimately reduce the amount you hand over to the taxman each year.
Here, we look at three ways to be more tax-efficient.
Pay into a pension
Putting money into a pension is one of the most tax-efficient ways to save, with HMRC paying generous tax relief on any contributions you make.
For example, if you’re a basic rate taxpayer and make a £1,000 contribution into your pension, the taxman will add £250 in tax relief automatically. If you’re a higher rate tax payer you can claim back another £250 in tax relief via your tax return, whilst if you’re a higher rate taxpayer you can get another £312.50 in tax relief.
Make the most of your annual ISA allowance
This tax year, which ends on April 5, you can shelter up to £20,000 in tax-efficient individual savings accounts (ISAs). There’s no income tax or capital gains tax (CGT) to pay on savings or investments held in an ISA, and you don’t need to include them on your tax return either.
You can either put money into a cash ISA, or investments through a stocks and shares ISA, or you can invest in peer-to-peer lending through an innovative finance ISA. Alternatively you can split your allowance between a combination of these. You can’t however, open more than one of the same type of ISA in a tax year.
Danny Cox, chartered financial planner at independent financial advisers Hargreaves Lansdown, said; “Those still to feel the pain of filing their tax return by the end of this month should take the opportunity to look at how the amount of tax paid next year could be reduced. For example, if you paid tax on the interest from your cash savings accounts, shelter them in an ISA as soon as possible."
Under the personal savings allowance (PSA), if savings are held outside an ISA, the first £1,000 of savings income will be tax free for basic rate taxpayers, but this falls to £500 for higher rate taxpayers, and there is no savings allowance for additional rate taxpayers.
Use your personal allowance
Everyone has a certain amount of income they can earn each year without paying tax, known as their personal allowance. For the current 2017-18 tax-year, this amount is £11,500 in the 2017-18 tax-year.
If you have joint savings with a spouse or civil partner, and one of you is a non-taxpayer or low earner, it may be worth putting savings into their name to make full use of their personal allowances and basic rate tax bands.