Liz Booth explores ways to reduce tax bills as the cost of living soars
With the cost of living crisis affecting families across the UK clients will be looking for ways to minimise their tax burden for the rest of 2022 and beyond.
Bristol-based Hargreaves Lansdown has pointed to eight ways clients will pay more tax from April this year onwards.
- National Insurance is rising.
- Frozen income tax thresholds mean more income tax.
- Dividend tax is rising.
- Inflation means paying more VAT.
- Council tax is rising.
- Rising house prices mean paying more stamp duty.
- Higher house prices and a frozen CGT threshold mean more tax for property investors.
- More estates will pay inheritance tax after allowances were frozen.
As Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, explains: “This April, just as we are reeling from horrendous price rises, the taxman will wade in to deliver another terrible blow. It is not just the horrible National Insurance hike and the miserable dividend tax rise – there are actually eight ways we will pay more tax, so it is worth taking steps to ensure we don’t end up paying more than our fair share.”
She goes on to point out that the amount of tax those in the UK pay almost doubled between 2001/2002 and 2019/2020 and, while it did reduce during the pandemic, January figures this year show it bouncing back with a vengeance.
Cutting tax in 2022
Hargreaves Lansdown goes on to explain five ways to battle the tax increases:
The government offers the chance to squirrel away £20,000 in this tax year – free of tax. If a client is saving to buy a first property, are aged 18-39 and have at least a year until they expect to buy, they should consider a Lifetime ISA, because in addition to tax-free growth, they get a 25% bonus on contributions. They can save or invest £4,000 this tax year.
Don’t forget Junior ISAs too. In the current tax year, clients can save or invest £9,000 in a JISA for any qualifying child, with all interest, dividends or capital gains being tax free.
Contributions to pensions attract tax relief at the highest marginal rate and the first 25% taken from the pension is usually tax free. There is tax relief on pensions even for non-taxpayers – on the first £3,600 a year. It means clients can contribute tax efficiently to a pension on behalf of a child.
3 Salary sacrifice
In some cases, the government will let taxpayers give up a portion of their salary and spend it on certain things free of tax (and in some cases, National Insurance). This includes pensions, childcare vouchers, bike-to-work schemes and technology schemes. This won’t boost their take-home pay but will cut the tax bill.
Assets that produce an income can be passed between spouses without triggering a tax bill. They can therefore be shared between a couple, so that both take advantage of their allowances
4 Spouse exemptions
Assets that produce an income can be passed between spouses without triggering a tax bill. They can therefore be shared between a couple, so that both take advantage of their allowances. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.
5 Marriage allowance
If one spouse is a non-taxpayer and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year.
Investment house Castlefield has some extra tips to pass onto your clients. It suggests that a starting point is to ensure clients have the right tax code.
It explains: “The tax code shows an employer how much tax to deduct from salary. For simple tax codes, the number within it shows the personal allowance for the year, which is the amount of income clients are allowed to earn without paying income tax. Any earnings after the personal allowance will be income-tax chargeable. For example, most people in the 2020/2021 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 the tax code is lower – for example, 1150 would mean the personal allowance was only £11,500. If the client is not receiving any taxable benefits in kind, then the personal allowance may be too low and they may be paying too much tax.
Castlefield also suggests maximising tax relief on pension contributions, pointing out that payments into your personal pension will automatically be boosted by 20% from HMRC (subject to certain limits), so an £80 contribution becomes £100. As a higher or additional rate taxpayer, personal pension contributions can attract further tax relief. As an employee, most workplace schemes provide 20% at source but clients must claim the other 20% or 25% through a tax return or via a letter to HMRC.
Castlefield adds that, if the individual is considering encashing an investment bond, or has incurred capital gains, making a pension contribution in the same year may provide valuable tax benefits. If employers will match contributions up to a certain percentage of salary, make sure clients pay a sufficient amount into the pension to benefit from the full employer contribution, if affordable.
Among its other suggestions, Castlefield suggests clients should ensure they:
- Claim all tax relief due on charitable donations.
- Reduce the high-income child benefit tax charge.
- Take full advantage of their personal allowances.
- Choose the best employment status.
- Make a tax-efficient disposal of a second property.
- Make annual use of CGT allowance.
- Ensure correct tax treatment of overseas income.
Not every suggestion will work for every client, but having a checklist is something that your clients are likely to appreciate – and it may save them money too.
Liz Booth is contributing editor of PFP
Image credit | iStock
Investment house Castlefield suggest clients should ensure they are familiar with any perks offered by their employer – or the government if self-employed, to help reduce tax and save money. For example, they 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.