Maximising your legitimate allowances and minimising your tax bill is not the same as hoarding thousands in an offshore tax haven; it’s simply good common sense.
The latest changes coming into effect in April 2016 particularly affect people who have any investments or savings. So don’t miss out on how you can cut your tax bill with a few simple adjustments to your financial planning.
Did you know that, from the new tax year starting in April, your normal savings account will be entitled to earn up to £1,000 interest tax free?
Are you aware that you will also be allowed to earn £5,000 from dividends tax free?
Tax free savings interest
As of April 2016, basic rate taxpayers will receive the interest on the first £1,000 of savings directly – as a tax-free savings allowance. This means more money in your pocket and less paperwork as you don’t have to fill in any R85 forms or submit a claim for a refund.
If you are a higher rate taxpayer, then you can earn up to £500 worth of tax free savings interest. Unfortunately, this allowance does not apply to additional rate taxpayers.
Dividends
One of the most pervasive new changes in April will allow every taxpayer to earn £5,000 from dividends tax free. This is, unimaginatively, called the Dividend Allowance and it’s great for people who want to see an income from their investment – and are not in the ‘big leagues’ of wheeling and dealing.
Once you have reached this £5,000 threshold then the rest of your income from dividends will be taxed at whatever tax bracket you are in; basic rate, higher rate or additional rate. But if the amount you earn from your shares takes you over one limit and into the next tax band, then the proportion of dividend income that falls inside that tax bracket will be taxed at that higher rate.
If you are in a civil partnership or marriage then you need to do some balancing so that you use the maximum allowance for each partner. For example, dividend payments going to the person with the smaller income to avoid taking the higher earning partner into the higher rate tax bracket.
It is also prudent to put taxable investments into an ISA where they are exempt from capital gains tax and can be withdrawn tax-free – saving you from the 7.5% hike in tax on any income from dividends that is over the designated tax free £5,000. In total you can ‘shelter’ up to £15,240 worth of investments in an ISA during this financial year. Work out the tax saving on that!
HMRC response
Rather unsurprisingly, HMRC haven’t exactly shouting about the thousands of pounds worth of savings taxpayers will be able to take advantage of from April 2016. George Osborne has included an assortment of new allowances and tax-free benefits that apply across the tax bands. But there is very little point in these announcements if taxpayers themselves don’t understand how the policy changes apply to them.
Whilst we all want to pay our fair share of tax, none of us should pay any more than absolutely necessary. At least one of these tax savings tips will probably apply to you and, as Granny used to say, ‘”A penny saved is a penny earned”. So, arm yourself with the knowledge of which of the new allowances will apply to you and work out how much your tax saving will be!
Tax Free Personal Allowance
This is the amount of income you are allowed to earn before you pay any tax and it changes every year. From April 2016, Personal Allowance increases to £11,000 – it is reported that 29 million British taxpayers will get more in their pay packet as a result.
The Higher Rate tax band will start from £43,000 from the start of the new financial year. This sees 130,000 taxpayers at the lowest end of the 40% tax bracket relieved of the extra tax bill.
Pension Changes
This has become quite the political hot potato and has left many taxpayers confused about what to do about their pension money.
The first point here is time sensitive and concerns tax-free pension contributions. If you are a higher earner then there is currently a loophole that will be closed next year. You are allowed to give your pension a good boost with contributions up to £80,000 per year – and you can backdate this for the previous three years! If you meet the eligibility criteria, and you can afford it, why not save yourself a potential £140,000 extra? Just be quick about it, this will not exist from next year!
The second point is about using the new pension flexibility most efficiently. You no longer have to take a 25% lump sum out of your pension pot when you retire. You can now keep your pension invested over a longer period of time, with every withdrawal from the fund being 25% tax free. It has been reported that this system could mean a saving of £64,000 over the course of a pensioner’s retirement and they pay a smaller tax bill!
Nil-rate Savings Band
This means that you don’t pay any tax on the first £5,000 of interest if your yearly income is up to £11,000.
There are ways that taxpayers can juggle their finances in order to get the maximum benefit from this allowance. For example, you can choose how much income you get from your pension in order to keep your total income within the tax free bracket. Also, couples that are in a civil partnership or married can move savings income into the realm of the person who earns the least.
ISAs – A Firm Favourite!
If you’ve had one since the beginning then you’ve probably saved up a substantial sum by now. Isn’t it great that its tax free to draw from them? An additional rule was added in December 2014 which means that spouses can benefit from their partner’s tax advantages even after their partner has died.
They are still being advocated by financial experts now, like Anne Bowes who is a director at the website ‘Savings Champion’, “Savers with substantial sums should look to use their cash ISA allowance. If interest rates rise in the future, your personal allowance will be used up more quickly.”
Savers and investors conclusion
So if you’ve managed to save, even during these financially strained times, make sure you make the most of your money. It may be the case, with the new tax-free savings allowance in place, that your money will do better in a savings account than a cash ISA. Time for a rethink – so you can take advantage of the changes as soon as they are operational.
