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.
Tax planning can make a huge difference to your income and wealth – especially in 2023, with the cost of living crisis putting pressure on real household finances. Optimising your affairs could save you £100s – perhaps £1,000s – each year, so it is worth taking time to do it.
Below, our Lancashire financial planners offer some general ideas on how to mitigate a needless tax bill in 2023. We hope this content is useful to you and please contact us if you want to discuss your financial plan with an experienced financial planner in Padiham.
Examine your income tax bill
In 2023-24, there are three main income tax bands in addition to the tax-free Personal Allowance (£12,570). These include the basic rate (20% on income between £12,571 to £50,270), the higher rate (40% on income between £50,271 to £125,140) and the additional rate (45% on income over £125,140).
Taking time to organise your household income could lead to tax savings. For instance, does your employer offer a salary sacrifice scheme? By choosing to lower your salary in exchange for another benefit (e.g. childcare vouchers), you could reduce or eliminate your exposure to a higher income tax band (e.g. the 40% rate).
For those in a committed relationship living together, it is also worth considering your joint tax plan. Each person is entitled to the £12,570 tax-free Personal Allowance, for instance. So, if two people both earn £30,000 per year, the overall household income may be more than a household where just one person is earning £60,000.
This is because one person can only use one Personal Allowance, but two people can combine two allowances for a combined tax-free income of £25,140.
Explore tax-efficient investment vehicles
The most commonly-know tax-efficient “wrapper” is probably the ISA (individual savings account). Yet many people do not use ISAs to their full potential.
For instance, each person is limited to putting £20,000 into their ISAs each tax year. Yet focusing an ISA allowance on cash may not be the best strategy for many people. Whilst your ISA interest will be tax-free, the interest rate will almost certainly not beat inflation (leading to a real-terms loss). Also, it may be possible to contain your total interest within your Personal Savings Allowance. This lets a basic rate taxpayer earn £1,000 each year from interest without tax; or, up to £500 if a higher rate taxpayer.
Instead, ISAs are often better used to build up a set of investments (e.g. shares and bonds). These assets have a greater chance of matching or beating inflation. Moreover, any capital gains and dividends will be earned tax-free.
Use your pension
A pension is one of the most efficient tools to save for retirement. It can also help to mitigate a tax bill in the shorter term. This is due to tax relief on your contributions (equivalent to your highest marginal rate of income tax). In effect, this puts into your pension that would have gone to the government in tax.
The annual allowance places a limit on how much you can contribute to a pension each tax year. In 2023-24, this is £60,000 or up to 100% of your earnings (whichever is lower). Sometimes, carry forward can be used to add unused annual allowance from the previous three tax years. Speak to a financial adviser to ensure you are using your pension to maximum effect.
Claim work-related expenses
Self-employed people will be familiar with claiming expenses. Doing so reduces your profits and, in turn, how much income tax you pay on them. By keeping accurate records (e.g. receipts), you can minimise forgotten claims and a needless tax bill.
Employed people may also be able to claim expenses, but the rules are very strict. Any claims must be proven to be “wholly, exclusively and necessarily” in the performance of your duties. For instance, you are unlikely to be able to claim the cost of office clothes which you wear to work. Yet you may be successful in claiming for specialist footwear in the construction industry.
Claim tax relief on charitable contributions
If you give to charity, be careful not to forget your tax plan. Gift Aid, for instance, lets charities and “Community Amateur Sports Clubs” claim tax relief on your donations to them. Certain taxpayers, moreover, can also “extend” their basic rate and higher rate thresholds by the gross charitable donation. For instance, a higher rate taxpayer can extend his basic rate band by £125 through a £100 Gift Aid donation.
This can be especially useful for those earning between £100,000 and £125,140 per year, where a taper to the Personal Allowance applies. For every £2 earned over £100,000 the Personal Allowance reduces by £1. However, Gift Aid donations “extend” the £100,000 threshold. For every £2 of donations, the Personal Allowance is restored by £1.
Invitation
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
E: info@elmfieldfp.co.uk
