12 Days of Taxmas
When you think of Christmas, what’s the first thing that springs to mind? Santa Claus? The fun or rigmarole of putting up the Christmas tree? Or perhaps Mariah Carey (other Christmas song artists are also available) pops into your head?
For centuries however, many people have associated Christmas as a time for giving. But if there’s one thing we can all agree on, it’s that there is one person that we really don’t want to be giving unnecessarily to this festive season and that’s the taxman.
So here are 12 tax-related tips that could help you prevent writing a larger cheque than necessary to HMRC:
1. Make the most of your Pension Annual Allowance
Despite the pension annual allowance having been frozen since the 2016/2017 tax year, you can still save up to £40,000 per year into a pension. What’s more is that the government will give your pension contributions a ‘top up’ or ‘bonus’ in the form of tax relief of between 20% and 45% depending on your level of income tax. This means for every £1 that is invested in your pension, the actual cost to you could be as little as 55p.
2. Watch out for the Lifetime Allowance
While the current pension lifetime allowance (LTA) stands at what appears to be a lofty £1,073,100, a diligent saver who started investing into their pension from an early age and generated a reasonable return could end up hitting and exceeding this limit quite easily. If you do exceed the allowance, then you could end up being hit with a hefty tax charge of up to 55% on anything over the LTA, so be careful.
3. Carry Forward unused allowances
If you have been unable to make full use of your contribution allowances over the previous three tax years, you might be able to benefit from making a larger contribution in the current tax year. This is known as ‘carry forward’. Making a larger contribution in anticipation of an imminent retirement could also boost the tax-free cash available.
4. Junior SIPPS – a very long-term present
While saving for your children’s retirement might not sound like the most exciting thing to do for Christmas, it can give a huge boost to their retirement savings. Currently you can save up to £3,600 into a child’s Junior SIPP. And like a regular pension, the government will also provide a ‘top up’ or ‘bonus’ in the form of 20% tax relief on contributions. This means if you contribute £2,880 a year, the government will add £720 basic tax relief (20%) taking the total up to £3,600.
5. ISAs – use it or lose it
With a £20,000 allowance each tax year, ISAs continue to be one of the most tax efficient ways to save as they allow you to earn interest or grow your investments free of tax, and withdrawals don’t suffer any capital gains or income tax. But unlike with pensions, where you have the potential to carry forward any unused allowance (see above), you have to use the allowance each tax year or it will be lost forever.
6. Junior ISAs
A Junior ISA (JISA) is a great way to help your child (or grandchild) build their wealth. Like the adult version, there’s no tax to pay on any interest or returns within a JISA. The JISA annual allowance currently stands at a generous £9,000 and while an account can only be opened by the child's parents or legal guardians, anyone can pay into it. It’s worth remembering though, while the money can’t be touched until the child turns 18, as soon as they hit this momentous age, they have full control over the money.
Each person has a gift allowance of £3,000 (known as your annual exemption) while they are alive, which allows you to give away cash or assets up to a total value of £3,000 a year without it being added to the value of your estate for inheritance tax (IHT) purposes. If you have used up your annual exemption then there’s always the seven-year rule to fall back on, which in simple terms means any gifts you make do not form part of your estate on death, so long as you survive more than seven years from the date of the gift. You can also give as many gifts of up to £250 per person as you want each tax year, so long as you have not used another allowance on the same person. Importantly, there is the potential that birthday or Christmas gifts you give from your regular income could be exempt from IHT as well – very handy for this time of year.
8. Utilise your spouse or civil partner’s CGT allowance
This tax year’s capital gains tax (CGT) allowance is £12,300 per individual but will be cut to just £6,000 in the next tax year. Should you have unwrapped assets, outside of say a pension or ISA, then it may be beneficial to make use of this tax year’s CGT allowance to avoid storing up higher future tax liabilities. Transferring assets to a spouse or civil partner, free of CGT, allows them to use their allowance too, effectively doubling the household CGT allowance for the year; if the recipient pays tax at a rate lower than the individual making the transfer, any gains over the allowance could also suffer less tax.
9. Passing on wealth – don’t get caught out with a 40% bill
Rising house prices have pushed more people than ever before into the dreaded inheritance tax net. Most do not wish to leave their loved ones with a large bill. With careful planning and some financial advice, you can reduce the impact, or mitigate completely, any tax liability. While giving assets away at least seven years before you die is the simplest way to mitigate any liability (see above) it’s not always appropriate. There are also numerous types of trusts that could be established for future generations.
10. Salary Sacrifice
If you’re working and your employer will allow you to make pension contributions via salary sacrifice, you can benefit from immediate tax relief and a national insurance saving on these contributions; your employer might also pass on some of the employer national insurance savings. Making a bonus sacrifice into your pension also benefits from tax and national insurance savings, but you might need to decide to make the bonus sacrifice before you know the size of the bonus.
11. Income tax allowance – work smarter, not harder
If you are married or in a civil partnership, are not benefitting from the Married Couples Allowance, and your spouse earns less than £12,570, it is possible to transfer up to £1,260 (circa 10%) of their personal income tax allowance to you – providing you earn between £12,571 and £50,270, or between £12,571 and £43,662 if you’re in Scotland. This could reduce your tax bill by up to £252 in the 2023/24 tax year and you could even backdate any claim for up to four tax years.
12. Consider an Onshore Investment Bond
UK investment bonds are taxed differently to other UK based investments, allowing investors to take advantage of some useful tax planning opportunities – they can be a good option in certain situations. There is no future liability to basic rate income tax or CGT on any bond gains, offering higher rate taxpayers the opportunity to invest while paying higher rates of tax, and make withdrawals when they might be subject to lower rates of tax, perhaps in retirement. Should withdrawals need to be made before a reduction in tax is applicable, 5% of the amount invested can be withdrawn without any immediate liability to additional tax, and unused allowances can be rolled forward.
Tax planning can be complicated, and the rules change often, so it is well worth engaging with a financial planner. To speak to a member of our Financial Planning team, get in touch on 020 3823 8678 or Talktous@7im.co.uk
In the meantime, we wish you a very Merry (ta)Xmas from all of us at 7IM.