Article published 09/02/2021
HERE ARE OUR TOP TIPS TO REDUCE YOUR TAX BILL…
1. ENSURE 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 in the 2020-21 tax year will have a personal allowance of £12,500 and the default code for this is 1250L. The number within the tax code therefore shows the personal allowance figure with the final zero dropped.
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 1250, 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.
2. CLAIM YOUR FULL ENTITLEMENT TO 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. Any claim must be made within four years of the end of the tax year that you are claiming for. Make sure you don’t miss out!
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.
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.
3. CLAIM ALL TAX RELIEF DUE ON CHARITABLE DONATIONS
Donations are easy to make online these days and donating through Gift Aid means charities and community amateur sports clubs (CASCs) can claim an extra 25p for every £1 you give (Source: www.gov.uk).
As with pension contributions, you can get higher or additional rate tax relief when you declare them in your tax return. So make sure you keep good – and accessible – records of your charitable donations each year and enter the amount you actually paid to the charity (not the uplifted amount after Gift Aid) on your tax return.
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.
In your self-assessment tax return you normally only report things from the previous tax year. But for Gift Aid you can also claim tax relief on donations you make in the current tax year (up to the date you send your return) if you either:
- want tax relief sooner
- will not pay higher rate tax in the current year, but you did in the previous year
You cannot do this if:
- you miss the deadline(31 January if you file your tax return online)
- your donations from both tax years together are more than 4 times what you paid in tax in the previous year
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.
4.Reduce High Income child benefit tax charge
An income tax charge applies where taxpayers receive child benefit and one or both of them has an adjusted net income over £50,000. For married couples, civil partners and couples living together who both have income above £50,000, the one with the highest net income will receive the tax charge.
A charge of 1% of the child benefit amount is applied for each £100 of adjusted net income over £50,000, and the benefit payment is effectively reduced to nil where adjusted income reaches £60,000. Making pension contributions or charitable donations to reduce adjusted net income (as above) can see a child benefit tax charge reduced or removed completely.
5. TAKE FULL ADVANTAGE OF YOUR PERSONAL ALLOWANCEs
The basic personal allowance for 2020–21 is £12,500, and is gradually reduced on a tapered basis for individuals with adjusted net income above £100,000. There are various ways to take advantage of the basic personal allowance and perhaps the most common is where one half of a couple is a higher rate taxpayer while the other is a nil rate taxpayer. Putting the income-producing assets in the nil rate taxpayer’s name could save up to £5,000 per annum (£12,500 x 40%).
Married couples and civil partners can take advantage of the ‘Marriage Allowance’ and apply to transfer 10% of their income tax personal allowance from one to the other, i.e. £1,250. Depending upon their individual tax situation, the tax saving will be up to 20% on this allowance – i.e. £250 maximum.
To qualify, neither of the partners can be a higher rate taxpayer and they must not be claiming the ‘Married Couple’s Allowance’ (where at least one of the couple was born before 6th April 1935). The Married Couple’s Allowance is a more generous benefit.
Read our 2020-21 tax tables here: https://www.castlefield.com/media/3689/castlefield-personal-taxation-2020-2021.pdf
6. CHOOSE THE BEST EMPLOYMENT STATUS
Are you employed or self-employed? As noted the previous tip, there are considerable advantages to being self-employed in terms of tax planning, yet this can also have disadvantages. For example, it can limit the tax relief available on pension contributions. It’s worth getting expert advice to determine the most suitable employment status for your situation.
Please note the rules around Contracting (IR35) are changing from 6th April 2021 and for many there is likely to be less flexibility of choice than there has been in the past: https://www.gov.uk/guidance/prepare-for-changes-to-the-off-payroll-working-rules-ir35
7. TAX EFFICIENT DISPOSAL OF A SECOND PROPERTY
The upsurge in ownership of investment properties has resulted in many people facing a Capital Gains Tax (CGT) bill on the eventual disposal of the property, which applies even if the property is gifted. However, there are various ways in which the tax bill can be reduced so it’s important to get planning advice at an early stage.
A recent change to be mindful of is that if you sell a UK residential property and a chargeable gain arises you’ll need to submit a CGT return to HMRC to report any gain, and pay the tax within 30 days of completion.
8. MAKE ANNUAL USE OF CAPITAL GAINS TAX (CGT) allowance
UK individuals can incur capital gains of up to £12,300 currently, without paying tax. If you don’t use this allowance you can’t carry it over to future tax years and so it makes sense to utilise it each tax year through crystallising gains, where practical to do so.
There is currently much speculation within financial services that tax rates on capital gains could increase, in which case it may be worth incurring taxable gains this tax year, whilst tax rates remain at current levels. See our article on the subject here: https://www.castlefield.com/news-media/blog/chancellor-requests-review-of-capital-gains-tax/
The current tax rates on capital gains ranges from 10% to 28% depending on the asset being disposed of and the individual's tax status. CGT doesn't apply to assets held in certain tax wrappers, such as an ISA or a pension.
9. ENSURE CORRECT TAX TREATMENT OF OVERSEAS INCOME
If you have income from overseas, is it being taxed in the country of origin? If so, there may be a double taxation treaty that allows you to offset the tax paid to another government against the tax demanded by HMRC. This can be a bit of cat’s cradle to untangle but can also be worth the effort.
10. 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: https://www.moneyadviceservice.org.uk/en/articles/salary-sacrifice-schemes
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 01/02/2021. 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.