Another tax year has almost passed again. It’s been a busy one for tax changes and if recent media speculation is to be believed, it’s going to go out with a bang when the chancellor delivers another statement.
But as we approach the end of the tax year, here’s 5 things you should think about to improve your personal finances.
Income Tax and Personal Allowance for High Earners
Has your income crept above the £100k mark – whether that’s because of a bonus, or a new job or significant pay rise? Do you know you start losing your personal allowance now?
For every £2 you earn over £100k, you lose £1 of your personal allowance. And so if you earn over £125,140 you don’t earn any money tax free.
Not only that, but if you have children, once you earn over £100k, you no longer qualify for the 20% help from the childcare account. Even if you earn £100,001 and your partner is unemployed. It’s gone – tough. But your next door neighbours could both be earning £99,999 and they still qualify. Seems unfair, doesn’t it – but what can you do?
You have two main options:
Option One – make a personal pension contribution. The gross amount of your personal pension contribution is taken off your earnings total.
Option Two – make a charitable donation.
Example: If your total earnings are £110,000, your personal allowance will be reduced by £5,000 and you won’t qualify for help with childcare. If you make a personal pension contribution of £8,000, your pension will claim back a further £2,000 of tax relief. This brings your gross pension contribution up to £10,000. This is then taken off your earnings, bringing your adjusted earnings back to £100k – so you keep your full personal allowance and tax free child care help.
The added benefit is when you complete your self assessment, you will get a further £2,000 of tax relief and so the £10k pension contribution will effectively cost you £6,000, as you have received tax relief at your highest rate of 40%.
A charitable donation works in the same way, but without the additional tax relief. You would need to pay £10k out of your pocket, to a charity of your choice.
Use Your ISA Allowances
You have until 5th April to use up as much of your £20,000 ISA allowance as possible. If you don’t use it, you lose it. This simply shelters the money from tax. If you have plans for the money in the next couple of years, you should consider holding it in a cash ISA. If not, however, why not consider a stocks and shares ISA?*
It can go up and down in value, but by investing for a long time (at least 5 years minimum) you should have a really good chance of beating both cash returns and inflation. If you fancy it, get in touch.
If you already have an ISA open, you can top it up (subject to your £20,000 annual allowance). Realistically, this should be done – at the latest – a few days before the end of tax year to be sure it is in your account in time.
If you have a Lifetime ISA – your allowance for it is £4k, which the government tops up to £5k. It’s too good to miss out on. Remember, if you use your full LISA allowance, you only have £16k remaining for your Stocks & Shares or Cash ISA.
If you’re saving for your children in a Junior ISA, you can contribute up to £9k in this tax year.
These are all “Use it or Lose It” allowances.
Review Your Cash Savings accounts
If you’re saving for something which you plan to buy in the next few years – like a house move – you should be keeping your money in cash. This is likely going to be in a Cash ISA, Cash savings account or possibly something like Premium Bonds? But what is the best way to go?
If it’s an old cash ISA, you probably had a bonus rate which is now gone. You might not even be making 0.2% at a time when you could be making up to 3%!
Consider this: You have a Personal Savings Allowance of £1,000 which can be earned from interest if you are a non or basic rate tax payer before tax is payable. This decreases to £500 if you are a higher rate tax payer.
If your savings account pays interest of 3%, you would need to have £33,333 in the cash savings account already before you had any benefit of tax-free interest in a Cash ISA. If you are a higher rate tax payer, you need £16,666 in a cash savings account before the Cash ISA has any tax benefit.
Review your Pension Contributions
If you haven’t already done so, review your pension contributions. The minimum contributions through auto enrolment probably won’t be enough to provide the retirement lifestyle you are looking for. If you can afford to do more, do it! You are the one who will benefit in the long run, and the minimum contributions really aren’t going to provide for the comfortable retirement you probably want.
Make sure you are getting the full matching contribution from your employer if they offer it.
If you can afford to increase your monthly contribution, explore the option of doing it through your workplace scheme via salary sacrifice to get an added bonus from saving National Insurance Contributions.
Beware of the High Income Child Benefit Tax Charge
If you, or your partner, earn over £50k and are claiming Child Benefit, you need to be careful. There is something called the High Income Child Benefit Tax Charge, where those who earn over £50,000 per annum lose their child benefit. For every £100 you earn over £50k, you pay a charge equal to 1% of your child benefit received. Once you earn over £60k, you aren’t entitled to child benefit. This is equally true if mum earns £60,000 and dad earns nothing, they will lose all child benefit, whereas if mum and dad both earn £49,000 each, they can still claim full Child Benefit. It’s a completely fair system – isn’t it?
Consider making an additional pension contribution to get around this. For example, if you are set to earn £52,000 this year, you could make a gross pension contribution of £2,000 to bring your Adjusted Net Income below the threshold, and then you won’t lose any.
Tax Annual Exemptions and Allowance are reducing
The Government have hit us with new lower tax allowances coming into effect on 6th April 2023.
First, the Capital Gains Tax Annual Exemption which currently stands at £12,300 will decrease to £6,000 overnight. This means that if you sell a rental property or second house or shares not held within an ISA or Pension for example, you will realise a gain. The first £12,300 this tax year isn’t taxable, but as of 6th April, only the first £6,000 won’t be taxable.
Secondly, the Dividend Allowance is reducing from £2,000 to £1,000. If you are a business owner, you might have your husband or wife on as a shareholder – beware that their allowance will decrease.
Finally, the bracket for Additional Rate Tax is reducing from £150,000 to £125,140. If you earn over this, you will begin paying more tax at the rate of 45%.
If this affects you, please speak to an adviser as there may be things you can do which help you get more into your pocket and save some tax
*Please note that past performance is not a guide to the future, the value of an investment and the income from it could go down as well as up. You may not get back what you invest.
^^This communication is for general information only and is not intended to be individual advice.