Here at Phebys, professional accountants in Huntingdon, we believe that everyone should be certain that they’re paying a fair amount of tax (and not tipping the taxman!). Here are our top ten legal ways to save on tax.
1) Marriage Allowances
As of 6th April 2017, married couples and civil partners can transfer £1,150 of personal allowance from the lower-earning partner to the higher earner, saving them up to £230 in tax. This is only available if the higher earner is a 20% taxpayer.
2) Take in a Lodger
Rent a room relief is an optional scheme that lets you receive up to £7,500 (in both 2016/17 and 2017/18) in rent each year from a lodger, tax-free. This only applies if you rent out furnished accommodation in your own home. If two people who share a property take advantage of the scheme, they can only claim £3,750 each.
3) Invest in Pensions
When you make a payment into your pension, you receive tax relief. If you have a personal pension, your contributions are paid into a fund after your income has already been taxed. For example, for every £80 you pay into an individual pension the taxman will add basic rate tax relief of £20. If you are a higher rate taxpayer, you can claim additional relief through your Self-Assessment Tax Return. If you are a member of your employer’s pension scheme, your contributions will be paid directly from your salary before it’s taxed, giving immediate tax relief. The tax you’d normally pay is invested into your pension instead. If you have given up existing salary or proposed salary increases to make additional contributions through salary sacrifice, you will not get tax relief, but you will save on income tax and national insurance contributions as you are reducing your salary in exchange for pension contributions.
4) Personal Savings Allowance
In 2017/18 (as with 2016/17), the first £1,000 of interest you receive from savings is tax-free if you are a basic-rate taxpayer. If you are a higher-rate taxpayer, the threshold is £500. Only when your savings income exceeds the allowance is any tax is due on it. This will no longer be deducted at source. If tax is due, you can pay it through your Self-Assessment Tax Return or have it deducted from your wages through an adjustment in your tax code.
5) Tax Breaks for Lower Incomes
For those on lower incomes (below £16,500), you may also receive up to £5,000 of interest tax-free. The more you earn from other income (e.g. your wages or pension), the less your starting rate for savings will be. Your starting rate for savings is a maximum of £5,000, which is reduced by £1 for every £1 of income you receive over the personal allowance threshold (currently £11,500). For example, let’s say you have an annual salary of £15,000 and get £200 interest on your savings. Your Personal Allowance is £11,500 and is used up by the first £11,500 of your wages. The remaining £3,500 of your wages (£15,000 minus £11,500) reduces your starting rate for savings by £3,500. Your remaining starting rate for savings is £1,500 (£5,000 less £3,500).
6) ISA Allowance
Also as of 6th April 2017, the annual limit will rise to £20,000 (from £15,240 in 2016/17). This can all be put in a Cash ISA, all in a Stocks and Shares ISA, or split between both.
7) Set Up Children’s Savings Plans
For those aged 18-29, consider paying into a Lifetime ISA (LISA). This is a tax-free wrapper that allows you to save up to £4,000 every year. The state will then add a further 25%. So, if you save £1,000, you’ll have £1,250 and if you save the full £4,000, you’ll have £5,000. And that’s before interest or growth. The bonus is paid every year until you hit age 50, so the maximum bonus you can receive, assuming you make the maximum investment each year of £4,000, amounts to £32,000. It’s designed for two specific purposes: the first is for first-time buyers to put towards a deposit for a residential property and the second is for later life.
8) Take Advantage of Dividend Allowances
All taxpayers have a £5,000 dividend allowance. This means any dividend payments you receive, either from a company shareholding or investments outside of an ISA or pension, will not incur a tax liability up to this level. Anything over £5,000 will be taxed at a rate dependent upon your marginal rate of income tax.
9) Make Charitable Donations
Take time to understand your tax position so as to make the most out of tax breaks on charitable donations. Some key income thresholds to be aware of are:
- £10,600 – the tax-free personal allowance that most people have;
- £42,385 – the point at which 40% tax starts for most people;
- £50,000 to £60,000 – the bracket in which child benefit is lost
- £100,000 to £121,200 – where a quirk in the tax system means income tax shoots up to 60 per cent;
- £150,000 and over – where the tax rate is 45 per cent.
For example, if you donate £100 to charity then they claim Gift Aid to make your donation £125. If you are a higher rate taxpayer you can personally claim back £25 (£125 x 20%) through your Self-Assessment or through your wages via an alteration to your tax code.
10) Avoid Inheritance Tax
Lifetime gifts are not usually counted as part of your estate for inheritance tax purposes if you live for a further seven years after making them. Known as Potentially Exempt Transfers (PETs), they can reduce your residual estate significantly. Also remember that you can make exempted gifts up to the value of £3,000 each year, without them being added to the value of your estate. You can carry any unused annual exemption forward to the next tax year. Each tax year, you can also give away:
- Wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child);
- Normal gifts out of your income, e.g. Christmas or birthday presents – you must be able to maintain your standard of living after making the gift;
- Payments towards another person’s living costs, such as an elderly relative or a child under 18;
- Gifts to charities and political parties.
Phebys – Accountants in Huntingdon
For further professional advice on how you can save tax, call Phebys on 01480 896267, or email email@example.com.