Charlie Reading, Founder and MD of Efficient Portfolio
After HMRC’s tax return deadline at the end of January, it can be tempting to drop your guard, believing that your new tax bill is a long way away.
It’s true, you’ve got a whole year until the next bill is due. What most don’t consider, however, is that there is a range of checks that you can do reduce that bill significantly.
Astute investors make use of their tax-free allowances every year and save thousands of pounds in the process. With such massive savings on the line, it’s a strategy to certainly consider.
With that, here are some easy checks and tips from Charlie Reading, Founder and Managing Director of Efficient Portfolio chartered financial planners, that could start you on your way to a much leaner tax bill:
1. Maximise Your ISA Allowances
Good returns, flexibility, diversity and tax efficiency should be key components in your financial strategy, and the ISA helps to deliver all of these. Historically, ISAs have been at the cornerstone of tax-efficient saving and are often referred to as one of the essential steps in your strategy, as they can help your wealth grow without you being penalised by heavy tax charges. They are an incredibly useful way of saving, and, as such, it is generally encouraged that people take advantage of their benefits. However, the ISA allowance is offered on a ‘use it or lose it’ basis, so if you fail to maximise it, you can’t make up the funds later on.
Up until 5th April 2020, you can contribute up to £20,000 into an ISA, and a further £20,000 from 6th April 2020, thereby sheltering up to £40,000 per person, as long as you’re over 18.
2. Top Up Your Pension While You Still Can
At the time of writing, the highest level of State Pension you can receive is £129.20 a week, which is frankly a paltry sum to live on. That’s why saving for the future is so important. It might seem wise to enjoy life now and worry about retirement later, but you’d only be damaging your future quality of life.
Pensions are a highly tax-efficient way of saving and now offer a great deal of flexibility in retirement, as when you retire you can gain access to 25% of your pension pot as a tax-free lump sum, with the remainder taxed at your marginal rate.
The current pension annual allowance is set at £40,000, so if saving for your future is a priority, it is worth investigating which pension is right for you, sooner rather than later.
3. Protect Your Estate from Tax
Inheritance Tax (IHT) is a concern for people from all walks of life. If you are hoping to leave a legacy to your loved ones, the last thing you would want is for that legacy to be taxed at 40% and lost to the Government.
One simple way of combatting this is to consider using your annual IHT allowance. During your life, you are allowed to give away £3,000 per year without incurring any IHT charges upon your death. There are of course downsides to this, in that you lose all access and control over the money, but it may be a tax-efficient strategy to consider.
4. Don’t Overpay Your Capital Gains Tax
The final tax consideration at this time of year is Capital Gains Tax, which is also given on a ‘use it or lose it’ basis and is currently set at £12,000. The issue of Capital Gains Tax is most acute if you hold investments which have grown above your tax-free allowance.
To ensure you make the most of your Capital Gains Allowance, it is generally recommended to sell down a portion of your portfolio to realise the growth made, but only enough to maximise your allowance, is the most prudent strategy.
These funds can then be used to fund any outstanding allowance on your ISA, for example. The advantage of doing so is that by placing your money from a taxable to non-taxable environment you have the potential for further growth, and you benefit in the longer term by potentially reducing a future bill.
There’s plenty of time left before the taxman comes knocking once again, but there’s no better time than the present to start looking into how you can save you and your business thousands of pounds simply through tax allowances you might not have previously been aware of.
