According to inews, in 2022 the British government could receive the highest-ever level of sustained tax revenue take during peacetime.
While it’s a pretty depressing start to the year, it’s not all bad as you may be able to reduce the impact that tax has on your household finances and wealth. The reason for this is that the government is surprisingly generous when it comes to tax breaks, and offers several lesser-known ways you could reduce your tax bill.
Read on to discover 10 that you might be able to use.
1. Use all your ISA Allowance
As you lose any unused element of your ISA allowance, make sure you maximise the amount you put into these tax-efficient savings or investments. In 2021/22, you can place up to £20,000 into ISA accounts, whether that’s a Cash ISA, a Stocks and Shares ISA or both.
Using all the allowance, or as much as you can, maximises the amount of wealth that’s exempt from Income Tax and Capital Gains Tax.
2. Move savings to a spouse
If you’re a higher-rate taxpayer and your spouse is a basic-rate taxpayer, you may want to consider transferring some of your savings to them.
This is because the Personal Savings Allowance allows basic-rate taxpayers to earn £1,000 in interest before being liable to Income Tax, whereas higher-rate taxpayers are allowed £500 (2021/22).
3. Use the Dividend Allowance
If you own a limited company or have shares, you may want to consider taking an income using dividends. This is because Dividend Tax is lower than Income Tax, and you could use the Dividend Tax Allowance, which means you can earn up to £2,000 in 2021/22 without being liable to the tax.
4. Use the Marriage Allowance if possible
If you’re married or in a civil partnership, you may be able to benefit from the Marriage Allowance. It can be used if one of you earns less than the Personal Allowance and the other is a basic-rate taxpayer.
The Personal Allowance is the amount the government allows you to earn before being liable to Income Tax, and in 2021/22 is £12,570.
The Marriage Allowance means that the lower earner can transfer £1,260 of their Personal Allowance to the higher earner, reducing the latter’s Income Tax liability by up to £252.
5. Double your Capital Gains Tax allowance
The sale of many assets, such as additional property, art, or shares not held in an ISA, typically generates a Capital Gains Tax (CGT) liability. Any profit made above the £12,300 CGT Allowance is liable to a tax charge of between 10% and 28% depending on what you’ve sold and how much you earn (2021/22).
By splitting the ownership of your assets with a spouse or civil partner, you can both use your CGT Allowance, effectively doubling it to £24,600.
6. Invest in fledgling businesses
The government encourages investments into young or fledgling businesses by offering generous tax incentives.
If you invest in an Enterprise Initiative Scheme (EIS) or a Venture Capital Trust (VCT), you can deduct 30% of your investment from your annual Income Tax bill. When you consider you’re allowed to invest up to £1 million into an EIS and up to £200,000 into a VCT, these could provide significant Income Tax reductions.
Always speak to a financial planner to ensure an EIS or VCT is right for you, and you fully understand the risks.*
7. Give a wedding gift
A lesser-known way you could reduce an Inheritance Tax (IHT) liability is to make a wedding gift. It must be made before the wedding, and different amounts can be given to children, grandchildren, or anyone else. These are:
- £5,000 to your children
- £2,500 to your grandchildren
- £1,000 to anyone else.
8. Rent a room out
If you have a room in your home that you could rent out, the government allows you to receive up to £7,500 a year in rent free of Income Tax. That said, rules apply, which means you must live in the home, and it must be fully furnished.
9. Donate to charity
If you donate to a charity through Gift Aid, the charity or sports organisation you’ve donated to can claim basic-rate tax relief on your donation. This means that if you’re a higher- or additional-rate taxpayer, you can also claim the difference as additional tax relief.
10. Use Private Residence Relief (PRR)
If you sell a buy-to-let property, you will typically be liable to Capital Gains Tax (CGT) at either 18% or 28%, depending on how much you earn.
What you may not realise though, is that if the property was your principal residence at any point, you may be able to claim Private Residence Relief (PRR), which could reduce the CGT you are liable to.
Get in touch
If you would like to discuss the tax efficiency of your finances and general wealth, or would like to discuss investments or your pension, please email us on admin@stonegatewealth.co.uk or call on 01785 876222.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
*EIS and VCTs are higher-risk investments that are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.
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