Finance expert explains how to ‘give yourself a tax cut’

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Autumn Statement: Key announcements from Jeremy Hunt

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Chancellor Jeremy Hunt unveiled the much anticipated Autumn Statement on Thursday morning, saddling the country with a historically high tax burden. Several tax freezes and increases were introduced in a bid to fill the £50billion fiscal hole and stem soaring inflation, and it has left many concerned about what it could mean for their wealth.

A number of tax thresholds, including personal allowance, higher rate, and inheritance tax, are now to be frozen until 2008, while the additional rate of income tax (45 percent) has been lowered to take in those earning £125,140, instead of the current level of £150,000.

Additional reductions are also being made in both the annual tax-free dividend allowance and capital gains tax exemption, as well as a continued deep freeze on the pensions lifetime allowance – and the annual pensions and ISA allowances.

The extension of the freeze on the basic and higher rate income tax thresholds until 2028 is going to steadily draw millions more into paying income tax. However, investment firm Bestinvest has offered insight for Britons to “give yourself a tax cut” by making use of certain allowances.

Jason Hollands, managing director of Bestinvest said: “The numbers drifting into higher rate tax bands had already been ballooning at an alarming pace of 43.9 percent between 2019/20 and the current tax year to 5.5 million. That number is sure to rocket much, much higher between now and 2028 given nominal wage rises.

“And the slashing of the threshold, from £150,000 to £125,140, for paying the very top rate – 45 percent – announced yesterday, which will kick in next April, will pile on the tax burden for higher earners.”

But, he continued: “There is something that the ballooning numbers of people subject to higher rate taxes can do about it. Pay into a pension, as pension contributions attract tax relief at your marginal rate.”

This means for every £1,000 gross contribution made into a pension by someone paying 40 percent tax, the net cost will be just £600 with half of the tax relief going into the pension as a top-up. This will boost its value and the other half reducing the person’s income tax bill for the year of the contribution.

Mr Hollands said: “There had been speculation that the Chancellor might remove or reform higher rate tax relief on pension contributions which have been eyed up by politicians of various parties for years.”

However, Mr Hollands continued: “Like a cat with nine lives, higher rate pension tax relief has once again lived to fight another day – for now. It continues to provide one of the best ways to reduce exposure to the higher rates of tax.”

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Venture Capital Trusts

For those already making full use of pensions and ISAs, but with further cash available to put away, investing in new issues of Venture Capital Trusts (VTC) can provide “a cocktail of tax benefits”, according to Mr Holland.

Investment in new VCT issues provides a 30 percent income tax credit (the shares must then be held for at least five years) and any dividends or gains are also tax-free.

Mr Holland said: “For high earners with substantial mainstream investment portfolios, modest exposure to VCTs can help enhance a tax-efficient investment strategy. Up to £200,000 can be invested in VCTs each tax year, providing a potential income tax reduction of up to £60,000.”

However, Mr Hollands continued: “VCTs are afforded these tax incentives for a reason: to encourage investment in small, early-stage, unquoted growth companies which meet strict criteria.”

This means they are inherently high risk – potentially more so during a recession – and so VCTs are not going to be suitable for everyone and exposure should only be modest, Mr Holland suggested.

He continued: “Although their underlying investments are businesses with growth potential, most VCTs aim to pay out returns made on these in the form of income.

“That’s because VCT dividends are tax-free, so gains made on the successful sale of a business in the portfolio are usually paid out as special dividends rather than retained to drive capital growth. VCTs can therefore be used to supplement a tax-efficient income portfolio.”

Another way Britons can reduce income tax strains and that’s to make use of “interspousal transfers”.

Interspousal transfers

With personal tax allowances under pressure, Mr Holland said this is one of the simplest things a married couple can do to organise their family finances tax efficiently.

Elaborating on what this transfer entails, Mr Holland said it means to “switch savings and investments held to a spouse to make use of two sets of allowances or so that more assets are held by whichever spouse is subject to lower rates of tax”.

However, he continued: “Married couples are able to transfer assets between each other without triggering a tax event – this is not the case for unmarried couples.

“Full use of family allowances can make use of two sets of capital gains exemptions, two dividend allowances and two ISA allowances and can therefore help reduce the overall amount of tax exposure for a family.”

Although, Mr Hollands noted: “Before transferring shares, funds or cash to your spouse, it is important to understand that they will become the full, legal owner of the assets – so if your relationship is rocky, this should be borne in mind.”

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