There is not long until the end of the financial year. We look at last-minute strategies to reduce what you pay the taxman.
There is not long left until the end of the current tax year on 5 April.
So if you want to avoid having your savings interest taxed, or are worried about losing child benefit payments, now could be the time to act.
Use your ISA allowance
Every year, each adult gets an ISA (individual savings account) allowance that they can use to save money or invest in shares without paying tax.
There is no tax to pay on interest on cash ISA holdings, whereas on a standard savings account you could lose 20%, 40% or 45% of your interest depending on which tax band you’re in.
Investment ISAs are free of capital gains tax, which means any profit you make in the future will never be taxed.
If you hang on to your ISA for many years and make regular top-ups, this could save you a substantial amount of money.
This year’s ISA allowance is £11,520, up to half of which – £5,760 – can be put into a cash account.
But if you don’t use it up by 5 April, you’ll have wasted this year’s allowance.
Cut your income and your tax bill
The less you earn, the less income tax you pay. We are not suggesting that you volunteer for a salary cut.
But if you put money into a pension, for example, HM Revenue & Customs treats it as if you didn’t earn this sum – and you pay less tax.
For example, if £5,000 of your income is in the 40% tax bracket, you’ll pay £2,000 tax on these earnings.
But if you could afford to put £5,000 into your pension, you’d effectively save this £2,000.
Neil Sims at wealth manager Helm Godfrey says: "There are a number of ways in which a person can reduce their taxable income in order to minimise the level of earnings that are subject to higher rate tax at 40%.
"Maximising pensions contributions is probably the most commonly used method."
Safeguard child benefit
Couples in which one partner earns more than £50,000 will have any child benefit payments reduced, due to rules which came in last year.
Anyone who earns more than £60,000 will get no benefit at all.
Sims says: "For families with three or more children, these payments can be worth many thousands of pounds a year – and even for a single-child family the annual payment exceeds £1,000, tax-free."
Making extra pension contributions is one way of reducing taxable income.
"Other approaches could involve transferring sources of income to a partner or spouse, if they are liable to a lower rate of income tax," Sims adds.
"This cannot be done with all income sources but bank accounts, rental properties, dividend-paying shares and other assets that generate interest or income can be transferred in this way."
Sacrifice your salary
Many employers offer staff tax-efficient ways of paying for the likes of childcare or even for a bike to travel to work on.
The cost of the childcare or bike is deducted from your salary before it is taxed, so you end up better off.
For example, if you are a basic-rate 20% taxpayer, you are eligible for up to £243 a month in childcare vouchers, for example.
This saves you £48.60 in income tax – and possibly more in national insurance – which means you are effectively getting £243 worth of childcare for £194.40.
It may be too late to sign up to such a scheme for the current tax year, but that shouldn’t stop you asking whether your employer offers it.
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