It pays to get your finances in order by 5 April each year. Fail to do so and you could miss out on valuable allowances that might reduce your tax bill, both now and/or in future.
We have squeezed in lots of tax savings suggestions below, so don’t worry if some don’t appeal or appear relevant to you.
Ways to reduce Income Tax
1. Pay money into a pension
Pension contributions benefit from income tax relief, i.e. a £100 contribution costs a 20% taxpayer £80, a 40% taxpayer £60 and 45% taxpayer £55. If you belong to a company pension scheme then contributions are usually made directly from your pay before tax, so you enjoy the full benefit straight away. Otherwise basic rate tax relief is given automatically at source while higher/top rate taxpayers can deduct the additional higher/top rate tax from their tax bill. You can invest up to your annual earnings, subject to a limit of £40,000 (including any employer contributions).More details
Tax Relief Calculator
2. Invest in a Venture Capital Trust (VCT) - high risk!
Not for the faint-hearted, as VCTs can be high risk investments – they’re basically funds that invest in very small companies. And let’s face it; saving income tax is pointless if investment losses outweigh the saving. Nevertheless, VCTs can make sense for some investors. There’s a 30% income tax rebate on contributions of up to £200,000 provided you hold the VCT for at least five years (and you have a sufficient income tax bill against which to offset the relief).More details
VCT Tax Benefits Calculator
3. Invest into an Enterprise Investment Scheme (EIS) - high risk!
Similar to VCTs in that your money must be invested in very small companies, but arguably even higher risk as your money is invested in the shares of single companies rather than a fund. An income tax rebate of 30% is given on investments of up to £1 million provided the shares are held for at least three years (and you have a sufficient income tax bill against which to offset the relief).More details
4. Give to charity
If you’re a higher rate taxpayer who’d rather give money to charity than the tax man then consider a charitable donation. When you make a donation through the Gift Aid scheme the charity can reclaim basic rate tax. You can then reclaim the additional higher rate tax via your return. For every £100 donated a higher rate taxpayer can reclaim £25.More details
Gift Aid calculator
5. Spend, if you’re self-employed
If you’re self-employed you can generally deduct all costs incurred for the ‘sole purpose of earning business profits’ from your turnover (excluding entertainment), plus expenditure on capital items totalling up to £500,000 (due to fall back to £25,000 in 2016) can also be deducted in the year of purchase under the Annual Investment Allowance.
1. Use your Individual Savings Account (ISA) allowance
The income earned from savings and investments within an ISA is not taxable. While this might not make much difference in the short term, the longer term tax savings could be very appealing, especially if you’re a higher rate taxpayer. ISAs can be especially useful if you’re aged 65 or over as any income paid does not affect your age-related personal allowance. The allowance is currently £15,000, which can be split between cash and shares as you wish.More details (Cash ISA)
Cash ISA Tax Saving Calculator
More details (Stocks & Shares ISA)
Shares ISA Tax Savings Calculator
2. Make best use of personal allowances
If you have partner then ensure you both optimise your income tax allowances. For example, if you’re a taxpayer and your partner isn’t, then transferring savings and/or investments into their name could save you tax on future income. The same applies if one of you is in a higher tax band than the other.Couple's Savings Tax Calculator
Ways to reduce Capital Gains Tax
1. Realise gains within your allowance
You can realise up to £11,000 of gains this tax year without having to pay capital gains tax. So if, for example, you have an investment portfolio containing more than £11,000 of gains then consider selling investments to strip out gains within this year’s allowance. Doing so could reduce the amount of tax, if any, you end up paying in future. If you wish to repurchase the same investments you’ll have to wait 30 days, but you can purchase other investments straight away.
If you’re married or in a civil partnership then don’t forget to use your partner’s allowance too. You can transfer assets to them free of tax which they can then sell to realise a gain within their allowance.More details
Capital Gains Tax Calculator
2. Don’t forget losses
If you’ve realised a loss, either this year or previously, you can offset it against any gains. Unused losses can be carried forward indefinitely, but you must inform HMRC of the loss within five years from the 31 January after the tax year in which the loss occurred.
3. Invest in an ISA/Pension/VCT/EIS
Money held in the above tax wrappers is free from capital gains tax. In the case of an EIS it must be held for at least three years to benefit, but if you owe tax on gains made on another investment they can be deferred indefinitely, as long as disposal of that investment was less than 36 months before the EIS investment or less than 12 months after it.More details
4. Consider taking a hit now to avoid higher potential capital gains tax rates in future
This is a risky strategy so think carefully before proceeding. If you have significant gains that you’ll unlikely ever escape using your (and your spouse’s) annual allowance, then consider taking a capital gains tax hit now while the rate is a relatively low 28% (for higher/top rate taxpayers). Taxes are generally rising and as capital gains tax is essentially a wealth tax it’s an easy target for any Chancellor.
Ways to reduce Inheritance Tax
1. Make gifts within your annual allowances
If you’re concerned about inheritance tax then consider making gifts if you can afford to.
By using annual gift allowances you can shift money out of your estate immediately and reduce the potential future impact of inheritance tax. For example, you can make annual gifts of up to £3,000 and also carry forward last year’s allowance if unused. Plus you can make as many gifts of up to £250 per person as you want. You can also gift as much as you want provided it’s out of surplus income and not assets such as savings and investments.More details
Inheritance Tax Calculator
2. Make gifts above your allowances and live for at least seven years
If your gifts exceed the annual allowances then provided you live for a further seven years they’ll still fall outside of your estate hence escape inheritance tax. But there’s no time pressure, the seven year clock starts from the day you make the gift and not the end of the tax year.
And don't forget...
After the end of tax year it's a good idea to check you've not paid too much tax or have an incorrect tax code.
Look at how much tax you've paid on earnings (if you're employed you can use the P60 form your employer gives you) and other sources of income such as pensions and savings accounts then check whether it's right. If you complete a self-assessment tax return you should do this in due course anyway.
You can read more about checking your tax code in our article here.