Castlefield top 10 tax tips
Castlefield Top 10 Tax Tips
In this blog article, we’ve put together a handy list of our top 10 tax tips. While these top 10 tax tips may help you to reduce your tax bill and minimise the overall amount of tax you pay, we don’t believe in exclusively focusing on tax mitigation when planning for our clients – tax is ultimately how we, as a country, fund our education, healthcare system and other national infrastructure. At Castlefield, we take our role as responsible investors seriously. That’s why we’re known as the thoughtful investor ®.
Broadly speaking, the taxes we consider when planning for our clients fall into the following three categories: tax we pay on our income (income tax); tax on the increase in value of our assets and investments (capital gains tax), and; the tax due on our estate upon death (inheritance tax).
When looking at tax in these three buckets and considering the tax changes introduced in the Autumn Statement in 2022, there are various allowances and planning steps that are valuable to keep in mind.
1. Keep tax in perspective
At Castlefield, we help our clients to understand how the tax system interacts with them and their assets. We’ll often make sensible use of tax efficient products, such as ISAs and pensions, and available allowances as part of a long-term financial plan. However, we aren’t in the business of helping clients invest in complicated tax structures that are designed solely to avoid tax ~ both we as individuals and as a business, and our clients, are aware of the social importance of paying a fair amount of tax.
We are also aware that our industry is very bad at communicating when it comes to tax, and typically uses scary language and jargon to make the sector seem more complicated and difficult to understand than it needs to be. That’s not to say some UK tax rules aren’t obscure. We therefore do our best to break down these barriers to comprehension, so that our clients are empowered and better understand their position and the options available to them.
Here’s a fascinating Language of Tax report, commissioned by the Good Ancestor Movement: https://static1.squarespace.com/static/6127ff51b5a0390e46a10c17/t/639aea43538e4d29b5336b26/1671096911231/Illume-Linguistics_Language-of-Tax_Kirstie-Skates.pdf
2. Self Assessment tax return
The changes announced in the Autumn Statement were aimed at placing the burden on those with the broadest shoulders. That said, one result will be that many people who have not previously completed a Self Assessment tax return will now have to.
For those who already complete a Self Assessment tax return, or those falling into this tranche for the first time, the following deadlines are important to be mindful of:
- The deadline for completing an online tax return is midnight on the 31st January.
- For those that are self-employed and make payments on account, the deadline for the second payment is midnight on the 31st of July.
- Additionally, the 31st October is the deadline for Paper Self Assessment tax returns
You can read more about Self Assessment tax returns here: https://www.gov.uk/self-assessment-tax-returns/deadlines
3. Changes to Capital Gains Exemption and Dividend Allowances
Jeremy Hunt’s Autumn Statement attempted to reverse a lot of the economic turmoil resulting from the September mini-budget. Among the announcements within this statement were freezes on many of the personal tax allowances, and a reduction in the additional rate tax threshold from £150,000 to £125,140. In addition to this, the capital gains exemption amount and the dividend allowance will see reductions in the 2023/24 tax year and subsequently in the 2024/25 tax year also.
The current capital gains exemption amount provides a tax-free allowance on capital gains of £12,300. From April 2023 this will reduce to £6,000 and this will half again in the following tax year to £3,000.
Similarly, the dividend allowance allows a level of dividends to be received before tax is due. The current allowance is £2,000, however, as with the capital gains exemption amount this will half from April 2023 to £1,000 and half again to £500 from April 2024.
These changes will see many more people exceed both of these allowances than previously. Where dividends received or capital gains realised are above these allowances, these will need to reported to HMRC through a Self Assessment tax return.
4. Tax on savings interest
Most people are able to earn some interest from their savings without paying tax. There are various allowances for earning interest before you have to pay tax, including:
- Your Personal Allowance
- Starting Rate for Savings
- Personal Savings Allowance
You can use your Personal Allowance if you have not used it on other income such as from a pension or salary. The current Personal Allowance means that you do not pay tax on the first £12,570 in this tax year. This is smaller if your income is over £100,000.
In addition to the Personal Allowance, the Savings Rate allows you to get up to £5,000 of interest tax free. For every £1 of income from other sources over the Personal Allowance, your Savings Rate for Savings reduces by £1 too. The Savings Rate is therefore not available for anyone with an income over £17,570 that does not come from interest.
Finally, with the Personal Savings Allowance you may get up to £1,000 of interest without having to pay tax on it. The Personal Savings Allowance varies depending on what tax band you are in:
- For a basic rate tax payer the Personal Savings Allowance is £1,000
- For a higher rate tax payer it is £500, and
- For an additional rate tax payer there is no Personal Savings Allowance.
Any interest earned in excess of these allowances will incur income tax. If you’re employed or receive an income from a pension, HMRC will change your tax code so you pay the tax automatically. If you complete a Self Assessment tax return, you will need to report any interest earned on savings.
Savings in tax-free accounts, such as ISAs and some NS&I accounts, do not contribute towards your allowances.
5. ISA and Pension allowances
Certain products, such as ISAs and Pensions, are incentivised by the government through various tax reliefs.
ISAs are a very tax efficient plan, being free from income tax and with any increase in capital value being exempt from Capital Gains Tax. Pensions share some similar tax treatment to ISAs with any growth within a pension being free from Capital Gains Tax. Contributions into pensions attract tax relief; typically, up to 25% of a pension can be taken tax free, and; pensions will fall outside of your estate for inheritance tax purposes.
The benefits of these policies are balanced with a limit on how much a person can contribute within a given tax year. The current ISA allowance is £20,000 per year. For pensions, the annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It is based on your earnings for the year and is capped at £40,000 per annum. In addition, you may be able to bring forward any unused annual allowances from the previous three tax years. It can be beneficial to make sure you maximise your use of these allowances where suitable.
Given the cuts to the capital gains annual exemption and dividend allowance, these policies, and utilising their allowances, will become increasingly valuable.
6. Tax relief on pension contributions
Payments into your personal pension will automatically be boosted by 20% from HMRC (subject to certain limits) so an £80 contribution becomes £100. If you are a higher or additional rate taxpayer, your personal pension contributions can attract further tax relief. If you are employed, most workplace schemes provide 20% at source but you must claim the other 20% or 25% through your tax return or via a letter to HRMC.
The additional rate threshold is set to be cut to £125,140 from April 6th 2023. This means that some high earners may wish to delay making some of the pension contributions until 2023/24 if it means they get more tax relief at additional rate rather than higher.
If you are considering encashing an Investment Bond, or have incurred capital gains, making a pension contribution in the same year may provide valuable tax benefits. A pension contribution can also help retain the income tax personal allowance and child benefit for those with income over £100,000 and £50,000 respectively.
If your employer will match your contributions up to a certain percentage of salary, make sure you pay a sufficient amount in to your pension to benefit from the full employer contribution, if affordable.
Any claim for higher or additional rate tax relief must be made within four years of the end of the tax year that you are claiming for.
7. Tax relief on charitable donations
Donations are easy to make online these days and donating Gift Aid allows UK charities to increase the value of donations they receive by 25% through reclaiming tax. The primary aim is to incentivise donations; however, it is still estimated that each year £600 million in available Gift Aid is unclaimed.
As with pension contributions, if you are a higher or additional tax payer you can also get further tax relief when you declare them in your tax return. High earners may benefit from deferring until the additional rate tax band is lowered to £125,140 in order to claim more tax relief.
For the charity to benefit from Gift Aid, you must have paid income tax at least equal to the amount that the charity will reclaim.
It’s important to keep good and accessible records of your charitable donations each year and to enter the amount you actually paid to the charity (not the uplifted amount after Gift Aid) on your tax return.
If you do not have to send a tax return, you can contact HMRC and ask for a P810 form for the same purposes. To make a claim you’ll need to submit this by 31 January after the end of the previous tax year.
(Source: https://www.gov.uk/donating-to-charity/gift-aid)
8. Annual gifting allowances aimed at reducing inheritance tax
Gifts are taxed to prevent people deliberately avoiding inheritance tax by giving away all their assets before they die. The below summarises the allowances available when making financial gifts. Broadly speaking, any gift that is made seven years or less before death that exceeds these allowances may be liable for inheritance tax.
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During your lifetime |
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During both lifetime and on death |
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[1] If you do not use the full £3,000, any unused part can be carried forward one year only to be added to the next year's annual allowance. This means the maximum could be up to £6,000 in some years.
[2] This exemption cannot be used in conjunction with the annual exemption. In other words, it is not possible to exempt gifts totalling £3,250 to the same person by using both exemptions together.
[3] Gifts can be of any size but must form a regular pattern of giving out of your income and must not reduce your normal living standards.
[4] In addition, you can choose to make charitable gifts in your will; such gifts can reduce the inheritance tax rate on death from 40% to 36% on the taxable part of your estate.
The reduced rate of 36% applies where at least 10% of your net estate (known as the baseline amount) is left to charity. The baseline amount is your entire estate in your sole name (but not including assets held in trust, or joint assets that pass by survivorship) less debts, funeral expenses and certain inheritance tax exemptions – such as the nil rate band.
9. Check your employee benefit perks
Make sure you familiarise yourself with any perks offered by your employer – or the Government if you are self-employed.
For example – you may have access to benefits such as:
- Cycle to work scheme
- Electric Car Charging Schemes
- Company Car - there is a lower Benefit in Kind charge for electric cars: 0% in the 2020-21 tax year, 1% next and 2% the year after. Cars with higher emissions are charged at a much higher rate
- Tax relief on household costs and equipment for some who work from home
- Health Screening and Medical services
- Additional employer pension contributions
Your employer may offer these benefits via Salary Sacrifice – when the employee agrees to exchange part of their salary in return for these benefits.
There can be disadvantages to sacrificing part of your salary – for example you may not be able to borrow as much from a mortgage lender – so make sure you check how it could affect you before signing up.
You can read more here: Salary sacrifice and your pension | MoneyHelper
10. Check your tax code is correct
Your tax code shows your employer how much tax to deduct from your salary. For simple tax codes the number within it shows your personal allowance for the year, which is the amount of income you’re allowed to earn without paying income tax. Any earnings after your personal allowance will be income tax chargeable. For example, most people will have a personal allowance of £12,570 this tax year and the default code for this is 1257L.
So, beware if your tax code is lower – for example 1150, would mean your Personal Allowance was only £11,500. If you aren’t receiving any taxable benefits in kind, then your personal allowance may be too low, and you may be paying too much tax.
If your tax code is higher than 1257, it shows a greater personal allowance being permitted before you’re charged income tax on your remaining earnings. If this is incorrect, then you could be in for a nasty shock at the end of the year when you’re told that you haven’t paid enough tax.
Article published 02/03/2023
Please note that this communication does not constitute taxation advice. Should you require taxation advice please speak to a taxation specialist or accountant. Any personal advice in respect of taxation is not regulated by the Financial Conduct Authority.
The taxation rates and allowances shown are believed to be accurate as at 01/03/2023. It is based on information obtained from sources which we believe to be accurate but the accuracy of which we cannot warrant and may be subject to change at short notice, therefore we cannot be held responsible for the implications of relying on this information.
Further information about taxation rates, allowances and protections are available at https://www.gov.uk.