This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Material gifts are often welcome at Christmas time – but what about more disposable income in your pocket, especially after a tumultuous year in 2020? Taking a few hours to check your tax plan can be the perfect opportunity to do so – especially the quieter moments of the December break. This is especially since the average UK household can expect to pay around £826,030 across a lifetime – both in direct and indirect taxes.
In this article, our team at Elmfield Financial Planning in Padiham, Burnley, Lancashire offer some ideas to optimise your tax position as we approach the 2021-22 financial year. We hope you find this content useful. If you’d like to speak to an independent financial adviser on any of these topics then you can reach us via:
T: 01282 772938
Get your tax code right
This might sound like an obvious tip, but a surprising number of people in the UK are believed to be on the wrong tax code – leading some to lose out on £1000s per year. COVID-19 has had a huge impact on working hours and employment status in the UK, so it’s important to not simply assume that your tax code is correct. You can find your tax code easily on your ‘coding notice’, payslips or P45s – which will be 1250L for most people. For some people – e.g. those incorrectly on the BR code – you may be due £100s back from HMRC.
Open and use your ISA
Not got an Individual Savings Account (ISA) yet? Consider opening one. In 2020-21, you are allowed to put up to £20,000 per tax year into your ISA(s) – with no tax levied on any capital gains, dividends or interest generated within the “wrapper”.
If you have recently come across a lump sum (e.g. an inheritance), therefore, and are not sure where to invest it, consider putting it into a Stocks & Shares ISA after consulting a financial adviser. This may help you to improve “real returns” by mitigating unnecessary taxes on your growth.
Be mindful of the deadline approaching in April 2021, when the 2020-21 tax year will end and you will lose any unused ISA allowance.
Use spousal transfers
If you are married or in a civil partnership, then there may be opportunities to mitigate the tax on your household by transferring unused allowances. For instance, in 2020-21 you are allowed to transfer up to £1,250 of your unused personal allowance (£12,500) to your spouse/partner if they earn more than you – or vice versa. This Marriage tax allowance could save up to £250 for your household. It’s not an earth-shattering amount, but it’s worth a bit of work to get hold of if you are entitled to it.
Moreover, married couples and civil partners are also allowed to transfer any unused capital gains tax (CGT) allowance to their other half. In 2020-21 this allowance stands at £12,300 per person, and the aforementioned couples can transfer assets between them tax-free. As such, it may reduce your household tax bill to move holdings to the spouse/partner in a lower tax band, or who is not projected to fully use their allowance before the end of the 2020-21 tax year.
Mitigating taxes with your pension
In 2020-21, Basic Rate taxpayers benefit from 20% tax relief on their pension contributions. For those on the Higher Rate the relief stands at 40%. As such, for the former it only “costs” 80p to put £1 into their pension, whilst for the latter it costs 60p. The 20p and 40p, respectively, would otherwise go straight to the government had it not been put into a pension. As such, with some careful pension planning it may be possible to reduce your tax bill in the short term whilst also growing your nest egg in the longer term.
For instance, suppose you earn £70,000 per year – putting £20,000 of your earnings firmly into the Higher Rate bracket, representing £8,000 in tax. If you can afford to do so, therefore, it may be wise to put this straight into your pension pot. Admittedly, this might reduce your income in the short term and you do not see the benefit until later. Yet this contribution could make a huge difference to your quality of life in retirement as it compounds in growth over future decades.
Check national insurance (NI)
For readers who are currently over their state pension age but still working, you are no longer required to make NI contributions. Here, a quick check of your payslip can determine whether you are still paying unnecessary Class 1 or Class 2 contributions. If you notice an error, make sure you contact your employer and HMRC with your proof of age – demonstrating that you are now over your state pension age and no longer need to pay NI.
If you are interested in starting a conversation about your own financial plan or investments then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938