Holly's 12 Cunning Tax Saving Tips

This week is a big ‘un. There are just 2 weeks to go until the end of the tax year. And as frozen thresholds mean we are pretty much all paying more tax, my friends it's time to channel your inner billionaire and get cunning on how to legitimately pay less. Why should non-doms have all the fun?

These 12 tips should have something for everyone, whether you’re a married couple, a teenager, a parent, a cash saver, a squillionaire, someone just tipping over into a higher tax band or someone on a mission to get a bit money smarter.

1. Use your ISA – it’s tax free and a brilliant place to start

If life were an apocalyptic computer game (discuss?!), the ISA is the financial equivalent of stockpiling food in your garage, locked away from the hungry villagers (played by Jeremy Hunt).

The ISA is basically a tax-free savings account and there are Cash ones or Stocks & Shares ones. You can mix types of ISA in the same tax year, so have a Cash one as well as a Stocks & Shares one. But you can’t currently pay into more than one of the same type, i.e. pay into 2 Stocks & Shares ISAs in the same single tax year.

The £20,000 allowance is for all your annual ISA contributions, so if money were no object, you could for example pay £8,000 into a Cash ISA for shorter-term goals and £12,000 into a Stocks & Shares ISA for longer-term savings.

With the annual allowance for tax-free dividends slashed to just £500 from April 2024, and the annual Capital Gains tax exemption at just £3,000, ISAs just get more and more appealing.

Some people get their knickers in a twist because they can’t think which shares or funds to buy in a Stocks & Shares ISA. No problem – you can transfer the money into your ISA and leave it there as cash, ready to invest when the inspiration takes you.

2. No cash, no worries – meet the ridiculously named Bed and ISA

If you haven’t got any spare cash, have you got any investments lurking in a ‘GIA’ (General Investment Account)? If so, could you sell these down and transfer them over into your tax-free ISA, thus shielding them from tax in future? This transfer is called a Bed and ISA for reasons too boring to go into. Just make sure you’re aware of any Capital Gains Tax this might incur AND ask your platform about Bed and ISA – if they do it for you, it will likely save you from the transaction fees of buying and/or selling. You could also shove them over into a pension (Bed and SIPP) and get tax relief too.

3. Cash savings? Are you going to be stung with a tax bill on your interest?

Basic-rate (20%) taxpayers can earn £1,000 in savings interest per year and pay no tax. Higher-rate (40%) taxpayers can earn £500 in savings interest per year with no tax, and additional-rate (45%) taxpayers get stuff all.

To give you an idea of what this looks like with current interest rates, £500 is what you’d earn from £10,000 in a top-paying savings account. So if you have cash savings at this level or above, it’s time to reconsider the tax-free Cash ISA. Hargreaves Lansdown have a great option here which lets you blend-fixed term and easy access cash in the single ISA with some good rates. And mix and match as you go.

4. Parents – are you just over the £60,000 child benefit threshold next year?

Child benefit eligibility depends on the salary of the highest earner. From April 6th 2024, the maximum threshold for child benefits was increased to £80,000. If you earn between £60,000 and £80,000, benefits will be paid at a gradually reduced rate.

Here is a really important thing to get your head around. Making a contribution into a pension has the effect of reducing your taxable income. So if your highest earner makes £62,000 a year, for example, and pays £3,000 into a pension – that reduces your taxable income to £59,000 and you get full child benefits. Cunning!

5. Just tipped over into a higher tax band? Don’t get mad, get even

Let’s continue with the theme of being able to tweak your taxable income. This is your biggest sword in my apocalyptic computer game.

Pension saving not only boosts your retirement income in the future but also slashes your Income Tax bill because any contributions attract tax relief at your marginal rate. Let me remove the gobbledygook. Basic rate taxpayers have 20% in tax relief added to their pension with each contribution, while those on the higher 40% and 45% tax rates can respectively claim a further 20% and 25% off their tax bill for the year.

For every £1,000 gross contribution paid into a pension by a 20% taxpayer, the net cost is just £800, with their pension account automatically receiving £200 in government tax relief. For a 40% taxpayer, the net cost after tax relief of a £1,000 pension contribution is just £600 while an additional rate taxpayer has a net cost of £550.

Here’s an example. Lucy’s total taxable income is £70,000 – let’s say £65,000 from work and £5,000 in interest on cash savings. Lucy pays £11,000 into a private pension (before we consider any tax relief mumbo jumbo). Her net income is the £70,000 minus the £11,000 = £59,000. As Lucy has 12 children, this pension sacrifice is not a bad idea because (from April this year) she will get child benefit. And she will also get the tax relief detailed above on this £11,000 contribution. As she is a higher rate taxpayer, she will get 20% at source – and then can claim back another dollop in her self-assessment.

So the trade-off is this. She gets a reduction in accessible income from £70,000 to £59,000. But she gains child benefits, and the 20% top-up on the £11,000 she pays into a pension AND then cuts her tax bill when she comes to do her self-assessment. AND gets the £11,000 in her pension.

6. Fat Cats – ideas for high earners and anyone in line for a bonus or sitting on a cash lump sum

The maximum you can pay into a pension this tax year is £60,000 gross (or 100% of your qualifying earnings which are typically from employment, not property). The maximum you can pay in will be the lower of these two numbers. Or to put it more simply, you can basically pay in up to £60k if you earn more than this. This maximum includes all pension contributions in the year – including tax relief and employer contributions. It gets rapidly less interesting for those with an adjusted income of more than £260,000 a year. Pass the tissues ;0)

7. Fat Cats 2 – if you earn more than £100k

Anyone earning between £100,000 and £125,140 is of course very lucky but from a tax perspective, you’re on the Highway to Hell. You have an effective tax rate of 60% on every £ earned in this band. Huh?

For every £2 of taxable income above £100,000, you lose £1 of the personal allowance of £12,570. This is the amount we can all earn without paying any tax. Couple the loss of this tax-free amount with the double whammy of the 40% higher tax rate and you are paying a whopping 60% Income Tax – or in other words for every £100 you earn in this band, you only take £40 home.

8. Drop a tax band with salary sacrifice 

If a pay rise or one-off bonus will tip your income into a higher tax band, it could be worth asking your employer about ‘salary sacrifice’. Some employers will let their staff reduce their salary or bonus payments in lieu of increased pension contributions.

Those close to the £50,270 earnings threshold where the higher 40% tax rate kicks in, could dip under it by using salary sacrifice pension contributions.

Salary sacrifice can also be useful for those nearing the threshold for the 45% additional rate of tax at £125,140 as well as those earning above £100,000 who have the painful 60% tax challenge described above.

9. Investors with some spare cash, a 5 year + timeframe and a tax bill to mitigate

I’d like to introduce you to a saucy little number called the Venture Capital Trust. These let you invest in early-stage businesses, they're high risk but bring nice tax breaks. One for more experienced investors who are relaxed with things you cannot immediately sell.

10. Find the romance in tax 

Married couples and civil partners have an arguably outdated tax advantage over their unmarried peers – the opportunity to make ‘interspousal transfers’ where savings and investments can be switched around without triggering a tax event. This enables a couple to engineer it so more assets are held by whichever spouse is subject to lower rates of tax.

Before transferring shares, funds or cash to your other half, remember they become the full, legal owner of the assets, so don’t do it if you obsessively watch Agatha Christie films for tips on poisoning your nearest and dearest, or are plotting your escape.

11. Put the rugrats to work or nudge generous grandparents

We can pay up to £9,000 a year per child into a Junior ISA. A child cannot manage the money themselves until they turn 16 and cannot access it until they are 18. At 18, the JISA will be converted into an adult ISA.

If your child is aged between 16 and 18 then they can pay in £9,000 to a Junior ISA and £20,000 to an adult Cash ISA before 5th April, giving them an ISA allowance of up to £29,000 in total – currently the largest allowance of all age groups. This loophole will be closed on April 6 when the minimum age to open a Cash ISA rises to 18 from the current 16. 

12. Inheritance Tax

This is getting more of a headache for more families. The tax take from April to February 2024 has been a record high of £6.8 billion. Money you leave to friends or family (not a spouse) is not taxed up to £325,000. There’s an additional £175,000 residence ‘nil rate band’ available where a main residence is left to direct descendants and the total value of an estate falls below £2 million.

Sums over this limit can potentially attract a 40% tax-charge payable by your beneficiaries, who may have already spent the money.

Phew! At this point you may be foaming at the mouth and in need of a very large gin. But hopefully there was something in here for you. Apologies to readers in Scotland for whom the tax numbers are different but the principles remain the same.

Have a lovely weekend everyone,

Holly

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