Depending on your situation, a few simple steps could have a big impact on your wealth – and the wealth of your loved ones. Below we’ve compiled a list of nine tips to lower your tax bill, preserve your benefits and protect the people you love.
Note, this blog post is intended as guidance-only and should not be taken as financial advice. If you are seeking financial advice, you can book a free initial call with one of our in-house advice team now.
Make the most of your ISA allowance
There really is good reason to use as much of your ISA allowance as you can. In the current tax year, a maximum of £20,000 can be put away tax free across different types of ISAs: cash, stocks and shares, Innovative Finance and Lifetime ISA. You’ll get another allowance in the next tax year, but your current allowance won’t roll over.
Once in an ISA, your money is tax-free for life. That means that however much you accumulate, you’ll never pay tax on income or capital gains from your ISA investments, which you might have to do if you invested that money in a different kind of account.
Throw what you can afford into a pension
Setting up a pension might be easier than you think. Plus, set up a pension and you can potentially benefit from tax relief, even if you’re self-employed or not working at all. Thanks to tax relief on pension contributions, adding to your pension with a lump sum can be one of the most rewarding investments you can make.
If you have a “relief at source” pension, as we offer at Nutmeg, your contribution is automatically topped up with an extra 25% in the form of tax relief from the government. So, for example, an investment of £100 turns into £125 once in a pension. The extra money is effectively a refund of the basic rate tax you’re assumed already to have paid. If you’re a higher rate or additional rate taxpayer, the tax “refund” is greater – you can claim back the difference on your tax return.
In the current tax year, you can potentially invest up to £40,000 in your pension. Unlike your ISA allowance, you can carry forward your pension allowance – for up to three years provided certain conditions are met – but be aware that your pension contributions in a year aren’t allowed to exceed your yearly income or the £40,000 annual allowance, depending on which is lower.
Be charitable – it could be in your interest
Charitable donations have something in common with pension contributions – they’re also eligible for tax relief. By signing a Gift Aid declaration, which allows charities to claim 25% from the government on top of your donation, you effectively access the same benefit as when Nutmeg adds 25% to your pension contributions.
As with pensions, higher rate and additional rate taxpayers are eligible for a larger tax refund, though you’ll have to add up what you’ve given over the year and declare it on your tax return. Services such as Just Giving should be able to show you a record of your donations.
One way to think about both charitable donations and pension contributions is that they reduce your adjusted income, which is the portion of your income you must pay income tax on. For example, if you earn £60,000 and give £10,000 to charity (or to your pension), your adjusted income would fall to £50,000, currently the upper limit of the basic rate tax band.
Protect your eligibility for child benefit
If you have an adjusted income of more than £50,000, the payment you or your partner can gain from child benefit is reduced by a levy called the high income child benefit tax charge*.
To protect eligibility for child benefit, which is currently worth £20.70 a week for your eldest child, you might want to consider paying into your pension or making charitable donations before the end of the tax year. These and other methods can bring your adjusted income down into the basic rate tax band.
The government’s child benefit tax calculator can help you work out if you are affected by the high income child benefit tax charge.
Make use of your dividend allowance
This allowance may affect you if you are a shareholder or director of a company, or if you invest in shares outside of an ISA.
You can earn dividends – payments made to shareholders from a company’s profits – of up to £2,000 in the current tax year without paying tax on them. The threshold used to be £5,000, but was cut to its current level from the 2018-19 tax year.
Everyone gets the same dividend allowance, regardless of your other income, but for dividend income over the tax-free threshold, the tax rate depends on your income tax band. Avoiding higher rate tax on dividends is potentially another reason to reduce your overall taxable income, for example with pension contributions or charitable giving.
Cut your capital gains tax by sharing
If your only substantial investments are in an ISA or pension, you may not have to worry about capital gains tax. But if you have other assets including, for example, company shares, a second home or valuable artworks, you should pay attention to your yearly capital gains tax allowance, which is currently £12,000.
You may be liable for capital gains tax if you sell or otherwise “dispose” of assets at a profit. For this reason, it may be worth spreading the disposal of large assets over different tax years to stay within the threshold.
If you have a spouse or civil partner, you can give assets to them without incurring capital gains tax, providing some conditions are met. That means they can effectively share their capital gains tax allowance with you.
Use the marriage allowance
You might have noticed that married couples and civil partners have access to a few tax benefits that others don’t have. Here’s another.
If you earn less than the personal tax allowance, which is £12,500 in the current tax year, and you are married or in a civil partnership with someone whose income is in the basic rate tax band, then you can transfer up to £1,250 of your personal allowance to them**. That addition to their tax-free allowance will potentially save them £250 a year.
Accessing the marriage allowance is another reason why someone might use pension contributions, charitable giving and other means to reduce their adjustable income to within the basic rate tax band.
Give gifts tax free
You can lower your inheritance tax bill by giving your heirs some of the money now, rather than leaving all of it as a taxable lump sum when you pass away.
This may seem a bit morbid, but this method is considered good practice when it comes to financial planning. Each year, everyone is allowed to give away up to £3,000 worth of gifts without them being added to the value of your estate. That means you can be sure these gifts won’t be affected by inheritance tax after you die.
Some other types of gifts are also exempt from inheritance tax, for example wedding or civil ceremony presents.
If you are thinking about inheritance tax planning and think your estate will be liable, make use of these exemptions before the end of the tax year. Gifts that aren’t exempt may incur inheritance tax if you die within seven years, in which case the recipients may be required to give back some of the value of the gift to the taxman.
Set up a Junior ISA
Invest up to the yearly maximum in a Junior ISA and help to give the children in your life a generous gift when they come of age.
University, a first car, a first home – there are lots of expenses young adults face. You can help the children in your life pay these costs by investing money in a Junior ISA on their behalf. At 16, they can begin managing the funds themselves and, at 18, they can with draw them if they choose.
The Junior ISA yearly allowance, currently £9,000, is like the adult ISA allowance. It won’t roll over. Your child will get another allowance in the next tax year, but if you want to maximise the value of the investment, use up this year’s limit before 5th April.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.
A stocks and shares Lifetime ISA may not be right for everyone. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in. Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions. If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.
The value of your Junior ISA can go down as well as up and you may get back less than you invest. To open a Nutmeg JISA, your child must be under the age of 16 and funds cannot be withdrawn until your child turns 18. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a Junior ISA is the right choice for you and your child, please seek financial advice.
A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.
A general investment account may not be right for everyone and tax rules may change in the future. If you are unsure if it is the right choice for you, please seek financial advice.
*You may also have to pay the charge if someone else gets child benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep.
**If you or your partner were born before 6 April 1935, you might better off applying for Married Couple’s Allowance instead.