Since inflation is expected to rise by the end of the year, you should start thinking about ways of making the most of your money by saving on tax.
The following tips by financial provider Hargreaves Lansdown might be exactly what you need to learn how to optimize your finances.
Remember that self-employed individuals are supposed to submit their self-assessment tax return by the end of January.
Getting Married Will Take You A Long Way
Your personal allowance, which is the amount of money you can earn before needing to pay tax will go up by £500 next year. However, if you’ve got married, you’ll be able to take advantage of the “Marriage Allowance” and transfer some of your personal allowance to your spouse or civil partner, should they have a higher salary than yours.
This will enable them to save up to £220 in the tax year.
In order for couples to be eligible for this benefit, you, as the lower earner in the household, must have an income of maximum £11,000.
It is possible for you to backdate your claim and save the double of the above mentioned amount, provided that you were eligible to receive this allowance for both these years.
Know Your New Personal Savings Allowance
The first £1,000 of the savings income of a basic rate taxpayer is tax free. Interest generated by corporate bond funds and peer-to-peer loans are also included in this income. Don’t forget to use this to your advantage and save some money along the way.
Higher rate taxpayers qualify for only £500 worth of savings interest tax-free. Additional rate taxpayers get nothing.
Transfer Your Dividends
The first £5,000 of taxable dividend income is tax-free. If there are two of you, you can take advantage of this not to pay any tax on your first £10,000 every year. For amounts above that, you’ll have to pay a percentage that depends on your taxpayer rate. If needed, you can transfer some of your dividends to a partner as a gift, as that’s a perfectly legal way of doing it.
Use Your ISA
Try to put £15,240 into an Isa (individual savings account) this tax year, and it will all be tax-free. This amount will be even bigger next year, so this method may enable you to save a lot of money on long-term.
Use Your Pension Allowance
A pension is more than a solid way to save money for your elderly years. It can also bring you some tax savings, as changes of the higher tax rates system can occur at some point in time.
For the time being, you can obtain your tax relief on your pension contributions in value of up to £40,000. In case your contributions fall below this figure, you won’t need to pay any tax on that.
You may also want to consider a ‘Bed and Isa’ (or ‘Bed and SIPP’). This means that you sell some of your shares and funds and you buy them back later on, but within an Isa or SIPP. This will enable you to protect your gains. If you don’t know how to do all these, consider asking for specialized help or instruct yourself on the topic.
Tax returns are also something a lot of people overlook but can be a great way to help you get back money that is yours. To see a full list of what you can reclaim take a look at VATIT.
Gains Are Better Than Income
The maximum rate of income tax is 45%, while the maximum rate of CGT is only 20%, with an allowance of £11,100.
Also, remember point 3, where we discussed the £5,000 tax free dividend allowance. Your growth assets will always be without a tax wrapper. On the contrary, income-producing assets will always bear a tax. Which type of asset do you think it better? The answer should be clear.
Keep In Mind That The Nil-Rate Inheritance Tax Will Rise
The expected rise of the nil-rate inheritance tax will be from £325,000 to £425,000. There’s also going to be an increase of £25,000 each year. This trend will stay like this until the tax year 2020/21. From that moment on, the nil-rate inheritance tax will increase at the same rate as the inflation.
According to these considerations, a couple could manage to save £1,000,000 free of inheritance tax. If this isn’t a good amount, then you say what is!
Nonetheless, you won’t be able to reach this figure unless you have ownership of your residence in joint names.
Would You Take Some higher Risk And Set For 30% Income Tax Relief?
Take a closer look into the world of venture capital trusts. You can invest in small businesses or start-ups and benefit from the 30% tax relief currently offered to investors. Nonetheless, you should know that you’ll only qualify for this tax relief if you hold those shares for at least five years. This can get risky, as you may not be able to predict how those companies are going to perform over such a long period of time.
This solution comes with an added benefit, which is that dividends you obtain from ordinary shares in venture capital trusts are free from tax.