Using tax allowances – structuring your finances tax-efficiently
Trisha Doan from our tax department explains a number of straightforward ways to take advantage of reliefs and allowances. They could end up saving you significant sums.
Making the most of your tax allowances and reliefs can save you a lot of money on your next tax bill. Here are a few different things that could help reduce your personal income tax liability.
- Checking your tax code
Your tax code shows your employer how much tax to deduct from your salary. It also indicates your personal allowance for the year, which is the amount of income you can earn before being subject to income tax. If you're on the wrong code, then you could be paying too much or too little tax.
- Pension contributions
If you pay tax at the basic rate, 20%, your pension scheme will claim tax relief from the Government on your behalf and add it to your pension pot. However, if you pay income tax at the higher rate (40%) or additional rate (45%), then you can claim additional tax relief on your Self-Assessment tax return or tax code. Any claim must be made within four years of the end of the tax year you are claiming for.
- Charitable donations
If you are a higher or additional rate taxpayer, then any gifts made under the Gift Aid scheme will qualify for immediate tax relief at 20%. For example, if you donate £100 to charity – they will claim Gift Aid of £25 from the Government and you receive the same amount in higher rate tax relief via your self-assessment tax return or tax code.
Other tax allowances
There are a number of other allowances that can help to reduce your tax bill, as follows:
- ISA allowance
If you are over 18 and a UK resident, then you can pay up to £20,000 into a stocks and shares ISA each tax year. ISAs are 'tax-free' which means the income received is free of income tax. Any capital gains on the sale of shares within an ISA are also capital gains tax-free.
- Starting rate for savings
If your income is less than the personal allowance, currently £12,570, and some of your income is made up of taxable savings income, i.e. interest, you could receive up to £5,000 of interest tax-free (actually taxed at 0%).
- Dividend allowance
In the 2022-23 tax year, you won't need to pay tax on the first £2,000 of dividend income. This is in addition to other allowances including, for example, the personal allowance of £12,570. Therefore, if you received, say, £14,570 from dividends and this was your only source of taxable income, then the first £12,570 is covered by your personal allowance and the remainder is covered by the dividend allowance.
- Marriage allowance
Where one spouse in a couple has taxable income of less than the personal allowance, they can transfer up to 10% of their personal allowance to their spouse. This can save a couple £252 each tax year. It is possible to backdate the marriage allowance transfer by up to four years, which means the couple receives a tax refund of £1,242 in the 2022-23 tax year.
- Capital gains tax allowance
Capital gains of up to £12,300 per tax year (for 2022-23) are tax-free. Married couples or civil partners who jointly own assets can therefore make tax-free capital gains of up to £24,600 between them.
If you are self-employed:
Sole traders and partnerships can benefit from a range of different tax strategies. Three examples are:
Deductible expenses – one of the simplest ways to reduce your tax liability is to claim tax relief on legitimate deductible business expenses incurred for the benefit of your trade. For example, office costs, travel or running costs for your home office.
Vehicle costs (cars, vans, etc.) – you can also claim tax relief on costs associated with using a vehicle for business journeys. You will need to either keep a record of all your motor expenses including, for example fuel, insurance, servicing, finance charges, repairs, etc. and then calculate the business use as a percentage of the total use based on the number of miles travelling in the year. Alternatively, tax relief can be claimed at set rates approved by HM Revenue & Customs for each business mile travelled, typically 45ppm for the first 10,000 miles and 25ppm thereafter.
Trading losses – if your business makes a loss in any given tax year, there are different ways in which tax relief can be claimed including, for example, off-setting the loss against any other income you may have in the same tax year. Always seek professional advice in respect of maximising tax relief from losses.
If you receive income from land or property:
If you receive income from land or property, then here are a few examples of tax reliefs available to landlords:
Rent a room relief – this allows you to receive up to £7,500 from the letting of a room or rooms in your house, each tax year, tax-free.
Expenses – landlords can claim tax relief on a range of expenses incurred in letting property. These include, for example, letting agent fees, service charges and accountancy fees. You can also claim tax relief on replacing 'domestic items', i.e. a washing machine. However, this only applies to items that are being replaced, not those being brought for use in a property for the first time.
Mortgage interest – when you take out a mortgage to buy a rental property, you can claim a tax credit of 20% of the mortgage interest paid each tax year.
If you would like to know more about tax planning, please contact us on 0115 955 5500 or email enquiries@pagekirk.co.uk