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With the new financial year starting in a matter of weeks, Britons are being urged to utilise and maximise their personal tax allowances to better prepare themselves for what looks to be the year carrying “the highest tax burden since the Second World War”. Several new tax allowance cuts and threshold freezes are due to come into effect, which could see millions paying out much more.
Chancellor Jeremy Hunt announced the new tax year policies during November’s Autumn Statement, which include slashing capital gains tax and dividends tax allowances in half; reducing the higher rate income threshold at which the highest 45 percent income tax band kicks into £125,140 from £150,000; as well as freezing a number of additional personal allowances despite high inflation.
With just over six weeks until the new financial year kicks off on April 6, Britons still have time to assess their finances to see where they can make a saving.
Alice Haine, personal finance analyst at Bestinvest, said: “Now is the time to take advantage of the tax allowances available to reduce your income tax liability, particularly for those hit with a sizeable tax bill for the 2021/22 tax year.
“Maximising tax allowances has never been more important following Chancellor Jeremy Hunt’s decision to freeze most personal tax allowances until 2028 in his Autumn Statement in November.”
Ms Haine continued: “With a record 5.5 million expected to pay income tax at the 40 percent band this year, as bumper pay rises push people’s salaries into higher tax thresholds, focusing on longer-term savings as well as the everyday bills will become imperative for those looking to reduce the income tax hit.”
For this reason, she said taking advantage of tax-free allowances on Individual Savings Accounts (ISAs) and pension contributions, as well as “crystallising” any capital gains to maximise this year’s more generous exemptions while they last, should be “front and centre” of minds.
Ms Haine added: “When you consider the flip-flopping on tax policy that the country endured in the final four months of last year, it proves there are few guarantees when it comes to your income tax liability. Britons now face the highest tax burden since the Second World War, and while the cost of living crisis dominated household budgets over the course of 2022, as the financial squeeze eases attention must turn to longer-term savings and cutting that dreaded tax bill.”
However, she noted: “Not all tax allowances can be transferred on to the next financial year, so most areas it really is a case of ‘use it or lose it’.”
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Open or top up an ISA to utilise £20,000 tax-free allowance
Savers can shelter up to £20,000 this tax year in an Individual Savings Account either in cash or investments. ISAs are attractive for taxpayers because all income and capital gains are tax-free, allowing wealth to grow and investments to be withdrawn without fear of a sizeable tax bill at the end.
Ms Haine said: “This really is a ‘use it or lose it’ tax allowance because once the April 5 deadline has passed, you cannot take it with you into the new year. For couples there is a double gain as they can squirrel away £40,000 in total (£20,000 each), making it an allowance not to be missed particularly when you hear whispers of the Government exploring capping the total amount held in ISAs at £100,000.”
To utilise the £20,000 allowance, people can simply open an ISA or top up an existing one and fund it with as much as they can afford.
Ms Haine added: “If you are opting for an investment ISA, don’t panic if you need more time to make an investment selection, you can simply store your money initially as cash and then drip-feed it slowly into the markets at regular intervals. Some platforms, such as Bestinvest, provide interest payments on cash balances, so the money won’t be sitting idle while you take more time to select your investments carefully.”
Those who don’t have cash lying around but do have shares and investments could look into applying for a Bed and ISA, which enables people to shelter assets held outside of a tax wrapper into an ISA
Top up your retirement savings to benefit from generous tax relief
For pension savers looking to boost their future pension income, now could be a good time to give retirement savings a boost.
Ms Haine said: “Money invested in a pension not only benefits from the beauty of compounding over the long term – an effective way to counteract the damaging effects of high inflation – but also protects against income tax as the contributions attract tax relief.”
While basic rate taxpayers get 20 percent in tax relief added to their pot with each contribution, those on the higher 40 percent tax rate get a further 20 percent and additional rate taxpayers receive a further 25 percent.
Ms Haine said: “For every £1,000 gross contribution paid into a pension by a 40 percent taxpayer, the net cost is just £600 giving their pot a generous £400 bump-up in tax relief. This makes pension saving undoubtedly the most tax-efficient way of saving money for retirement, something that has become even more pertinent amid the extended freeze on the basic and higher rates of income tax until 2028, which will drag millions more into a higher tax band.”
It should be noted that once money is added to a pension, it cannot be touched until the person is 55, or 57 from 2028.
Plus, Ms Haine added: “Go over the pension contribution limit and you risk incurring a tax charge. Thankfully, you can carry forward any unused annual allowance from the previous three tax years. So, use up your allowances in the run-up to the end of the tax year in April, particularly if you are a higher earner.”
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Don’t ignore the value of ‘interspousal transfers’
As personal tax allowances come under pressure, married couples and civil partners have a very lucrative tax advantage, which allows them to make ‘interspousal transfers’.
This describes the process of switching savings and investments over to a spouse subject to lower rates to tax without triggering a tax event.
Ms Haine said: “This allows the couple 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, she added: “Before transferring shares, funds or cash to your other half, just remember that they will become the full, legal owner of the assets, so tread carefully if you have any doubts about the strength of your relationship.”
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