With the 2022/23 tax year now well underway, it is time to talk about tax – and about ways to pay less of it.
Paying tax is something we all need to do, but many of us pay more than we need to because we don’t take full advantage of the allowances we are entitled to.
At Continuum we are looking at those allowances, how you can make the most of them, and why understanding them is essential to make the most of your money in the new tax year.
Your taxes have gone up
The Covid crisis has left the treasury with a huge deficit. According to the Office for National statistics, UK general government gross debt is £2,223.0 billion, equivalent to 103.7% of gross domestic product (GDP). It is hardly surprising that taxes must increase.
Chancellor Rishi Sunak has been clever, and not increased the rates of most taxes, while ensuring that we will actually be paying more.
Although taxes may not have increased, the combination of inflation and the Chancellor’s freeze on allowances may mean that you will actually find yourself paying more to the taxman – in income tax, NI, and capital gains.
It means that making the full use of your allowances is more important than ever.
At Continuum we have put together a checklist – with tax topics you may want to check now.
Income tax is one of the biggest tax burdens for most people, and the more you earn, the more tax you will pay.
But because income tax is charged in bands, there could be scope for reducing the amount you actually pay, by reducing your taxable income. Key to this is the personal allowance. The Personal Allowance is set at £12,570 for 2021 to 2022, and the basic rate limit is set at £50,270. The higher rate threshold runs from £50,271 to £150,000 at which point additional rates kick in.
If you reduce your taxable income to below £150,000 you avoid 45% (or additional rate) tax. Reducing income below £ 50,271 will take you out of higher rate (40%) tax and into basic rate at just 20%.
You can’t simply refuse to take home some of your salary. You need to divert your money elsewhere. For most people, increasing their pension contributions is the simplest answer. Paying more into your pension is a good idea anyway, and as long as you remain under the £40,000 annual limit, and a lifetime allowance of, currently, £1,073,100 the taxman will be pleased to pay into your pension pot alongside you.
In some circumstances you may be able to use the marriage allowance transfer to your spouse or civil partner to boost their personal allowance.
Capital gains tax
Capital gains tax or CGT has been increasing in recent years, but there is an annual exemption of £12,300, meaning that you can dispose of assets and make capital gains up to that amount with no tax obligation. Any amount unused cannot be carried forward – it is a case of use it or lose it – but it may be possible to reduce your tax obligation by carefully timing the disposal of an asset and using two years allowance.
Again, it may also be possible to reduce CGT by transferring your assets to a spouse or civil partner.
Savings and investments
Savings income and dividends from investment can both be liable to tax, but there are some simple ways to reduce or even eliminate those taxes.
First, are you making full use of your personal savings allowance? This is £1,000 for a basic rate taxpayer and £500 for anyone who pays higher rate tax. This means that married couples and civil partners can have £2000 of savings income between them. (If they are both basic rate taxpayers)
Investments are more complicated. The Dividend Allowance means that you won’t have to pay tax on the first £2000 of your dividend income, no matter what non-dividend income you have.
But for most people the answer to mitigate your tax liabilities is by making full use of your ISA allowance. You have a £20,000 ISA entitlement each year, meaning that a couple can protect up to £40,000 of investment from the taxman each year.
Getting some expert help
The mountain of legislation that has built up over the years makes tax complicated and finding the best way to keep tax to a minimum requires an expert guide.
At Continuum we have the expertise you need to make your 2022-23 tax burden a little easier to bear.
Call us now and talk about tax – and how we can help you pay less of it.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice.