1. Use your tax bands and rates to the fullest.
If you are married and your spouse falls into a lower tax band than you, make sure investments and savings are in their name in order to fully use their personal allowances and lower tax rate.
Married couples are able to move assets between them without incurring a tax charge. This means that moving income-paying investments from a top-rate taxpayer to a non-taxpayer could increase the investment income by double as it would no longer be taxed at 50% (45% in 2013/14). Gains made when the investment is sold would also be taxed at the lower Capital Gains Tax rate of 18% rather than 28%.
2. Use ISA’s for cash and investments
Anything held in an ISA is not chargeable to capital gains tax or income tax. Thus it’s important to fully use your allowance each year. It normally won’t cost any more to keep an investment in an ISA making it a free tax break. The allowance for this year is £11280, £5640 of which can be in a Cash ISA. (£11520 and £5760 in 2013/14)
3. Use a pension to save for retirement
Pensions offer considerable tax benefits. A basic-rate taxpayer paying £8000 into their pension will automatically receive £2000 basic-rate tax relief from the government. Higher rate taxpayers can claim back up to £3000 more, meaning a £10000 pension saving each year could cost only £5000. The tax breaks don’t only apply to contributions either, with those over 55 being eligible to take up to 25% as a tax-free lump sum.
Please remember that the exact amount of tax relief available to you will depend on your exact circumstances.
4. Gains are taxed far less than income
The rate of capital gains tax (up to 28%) paid is lower than the income tax rate (up to 50% – 45% after 2013/14.) As well as this, you have an annual capital gains tax allowance (£10600 in 2012/2013 – £11000 in 2013/14).
While this shouldn’t be the sole factor in affecting your investment decisions, it’s important to understand the differences and attempt to take advantage of them if possible.
5. Make pension contributions for non-earners
Even those with no earnings can still contribute up to £2880 each year to a pension and receive and additional 20% contribution from the government. That means if you pay £2880, £720 will be paid by the government in tax relief.
If you didn’t take advantage of some or indeed all of the above tax breaks in the current tax year make sure you come to Calvert Financial Solutions and we will make sure you do in the next.
by Tom Calvert