Opportunities to save tax

As many tax allowances have been frozen for the last few years and the foreseeable future, ensuring you have used your available allowances can make a big difference to the tax you have to pay.

Every individual (if domiciled and resident in the UK), is entitled to a tax-free personal allowance for the year of £12,570, below which, no Income Tax liability arises. If your total taxable income exceeds £100,000, this personal allowance starts to be reduced.

Every individual is also entitled to a tax-free dividend allowance of £1,000 (falling to £500 from 6 April), and a tax-free savings allowance for interest income of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

When you look at the overall level of tax for yourself, or as a couple if you are married or in a civil partnership, it may be possible to reorganise your finances to make greater use of your allowances. If investment or savings income is more in favour of one spouse, the other may not be making full use of their allowances or lower tax rates.

If there is an opportunity to adjust the ownership of assets to balance this position, the saving in Income Tax can be significant. For example, one spouse may be a higher rate taxpayer and the other is a basic rate taxpayer. Deposit accounts held by the higher rate taxpayer benefits from a lower tax-free saving allowance of £500 and any additional interest is taxed at 40%. Transferring these accounts to a basic rate saving spouse will double the tax-free allowance to £1,000 and halve the rate of tax at 20%. With the interest rates on deposit accounts rising sharply last year this could result in a big tax saving for some couples.

Transfer of assets between spouses are not generally chargeable events for Capital Gains Tax (CGT) or Inheritance Tax purposes, but do take care when considering any transfers of properties, as there could be unintended consequences affecting Stamp Duty Land Tax and availability of CGT reliefs.

Still largely underclaimed, the Marriage Allowance was introduced in April 2015 and is available where both spouses were born after 6 April 1935 and one partner earns an income under the Personal Income Tax allowance of £12,570 and the other is a basic rate taxpayer.

In these circumstances, if one spouse is not fully utilising their tax-free personal allowances (including the dividend and savings allowances mentioned above), they can claim the Marriage Allowance to transfer 10% of their personal allowance to their spouse – £1,260 for the 2023/24 tax year, which would represent a tax saving for the recipient spouse at 20%, of £252.

It is also still possible to backdate the claim to previous years. This is a permanent election that needs to be made directly with HMRC (the claim is not initially made on a tax return) here https://www.gov.uk/marriage-allowance. It can be cancelled in a later year if you cease to meet the criteria.

Every individual is entitled to an Annual Exemption from CGT, with total gains below that limit (£6,000 for 2023/24) having no charge to CGT. This is a use it or lose it relief, so if not used, it is lost and cannot be carried forward to the following year. The allowance next year will fall to £3,000 so if you are holding assets at a gain, it may make sense to realise some of the gain in the current tax year to take advantage of the higher exemption.

With the allowance falling from April, it may be worth considering realising gains that will only be taxed at the lower rate of 10%. This is half of the standard income tax rate and there is no guarantee that this low rate will continue.

As with looking at transferring income producing assets between spouses to benefit from lower rates of Income Tax, the same can be true for CGT. If an asset is transferred between spouses prior to a sale, you could make use of a further annual exempt amount, and perhaps lower rates of CGT depending upon their level of income.

Another ‘Annual Exempt’ amount available for every individual, is one in respect of IHT. While not strictly affecting the tax you pay on your annual return we talked earlier about transferring income between spouses but an IHT gift of an asset will also, in many instances, transfer the income ownership away as well and reduce your tax accordingly.

Generally, when someone makes a gift to an individual, this is regarded as a Potentially Exempt Transfer for IHT purposes. This means that if the donor survives for seven years from the date of the gift, it will become exempt from IHT. However, if they pass away before seven years has passed, the amount of the gift will still be included in their estate in calculating the IHT due.

There are a number of potential exemptions available, but the standard Annual Exempt amount is £3,000. If total gifts within a tax year are less than this, the gifts will be immediately exempt and the seven-year survivorship rule does not apply.

It is possible to carry forward an unused annual gift exemption for one year if it has not already been used. Therefore, if you did not make any gifts in the 2022/23 tax year, you could potentially make gifts of up to £6,000 by 5 April 2024 with immediate exemption from IHT.

Do note that you are regarded as using your current year allowance first, before any unused brought forward allowance. Therefore, if you did not make any gifts in the 2022/23 tax year and you make gifts of £3,000 in the 2023/24 tax year, you will have used your 2023/24 allowance and there will be nothing to carry forward to the new tax year.

ISAs are a great means of tax efficient investment, as income arising from the underlying investments is tax free, as is the capital growth, so no exposure to Income Tax or Capital Gains Tax (CGT). In an era of very high personal tax, the tax-free status of ISAs makes them very valuable tax wise.

While individuals have a dividend tax free allowance, this has reduced in value over the years – starting at £5,000 when it was introduced in 2016 but will fall to only £500 on Saturday 6 April.

You may have directly held investments which are paying dividends and if you have not already used your ISA allowance for this tax year you could transfer existing investments to reduce your tax burden for the future. Be aware there could be other tax implications, especially CGT so you should take advice before acting.

The annual limits for ISA investment are currently £20,000 in total for an adult and £9,000 for Junior ISA for a child under the age of 18.

Pension contributions remain a highly effective tax planning tool.

When you make a personal pension contribution, this is net of basic rate tax at 20%. So a contribution of £800 means you will have tax relief added and there will be £1,000 in your pension. If you are a higher or additional rate taxpayer, you can claim further tax relief through your tax return, so that you pay less tax at the higher rates and you reduce the effective cost of the contribution.

This can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000. For those with taxable income of £125,140 or above, pension contributions of £25,140 (or higher within limits) can both restore your full personal allowance and obtain higher rate relief. The effective rate of tax saving on these contributions is 60%.

For those with younger children and a salary above £50,000, if you or your partner are receiving Child Benefit, there is the High Income Child Benefit (HICB) charge which starts to offset the benefit, with the tax charge equalling the benefit once income reaches £60,000. By making personal pension contributions it is possible to effectively reduce your income and reduce the charge.

This is, however, a complex area and dependent upon your level of income, there are set rules as to how much you can contribute during a tax year and obtain tax relief, so do be careful and seek advice before making a contribution.

The amount you can contribute is partly linked to the amount of earned income you have in a tax year, usually from employment, self-employment, or profits from qualifying Furnished Holiday Lettings. However, if you do not have income from any of these sources, you are still entitled to make a contribution to a pension scheme of £2,880 and receive tax relief by the pension provider topping this up with £720 from HMRC to give a total amount invested of £3,600 gross.

This can be an effective means of building up pension savings for children and grandchildren, as contributions can be made by a third party on behalf of another individual. 

In this day and age of a cost-of-living crisis, Charities can find it extremely challenging to raise funds. This is where charitable donations can prove to be a lifeline but also very tax efficient.

If you are a higher or additional rate taxpayer, making a gift of cash to a UK registered charity (and ensuring you tick the Gift Aid declaration) can reduce your tax liability. This can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000 or the High Income Child Benefit (HICB) where income exceeds £50,000.

When you make a cash gift to a charity under the gift aid scheme, this is treated as being made net of basic rate tax at 20%. The charity then reclaims the tax from HMRC. For example, if you make a donation of £80, the charity then reclaims a further £20 from HMRC.

Where you pay tax at 40% or 45%, you can claim additional tax relief through your tax return, so that you effectively only pay 20% tax on income up to the gross value of the donation, rather than at the higher rates as you normally would. Continuing with the example above, as a 40% taxpayer, by making a donation of £80, the charity will receive a further £20 from HMRC, and you will receive relief through your tax return of another £20.  The charity therefore receives £100, but the cost to you is just £60.

You can actually make your Gift Aid donation after the end of the tax year and claim to carry it back to the 2023/24 year, as long as the donation is made before you submit your 2023/24 tax return and the claim is included on your original return (you cannot claim this on an amended tax return).

Trading allowance and property allowance

These allowances were introduced in 2017 to deal with those who have low levels of income from a ‘side hustle’, selling second hand clothes online, rent out their house infrequently or have a low paying part time job.

With the rise of websites such as eBay or vinted where you can sell old clothes online, trading allowance means that if your self-employed income is below £1,000 from these sites you usually do not need to tell HMRC. The allowance can also be offset against casual work such as babysitting or gardening.

Property allowance is similar, for those that infrequently use Airbnb or similar websites who earn under £1,000 from renting their property out, or other property income.

The Rent a Room Scheme

The property allowance cannot be used against renting out a room in your own home but there is a separate tax relief for this, The Rent a Room Scheme. This lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.

The tax exemption is automatic if you earn less than £7,500. This means you do not need to do anything. But if you earn more than this you must complete a tax return.