Here are five simple tax rules you can take advantage of before 5 April to reduce your tax liability and maximise your savings.
The total amount you can pay into your Individual Savings Account (ISA) each tax year is currently £20,000. Any income earned from investments or interest on cash savings is tax free. The gain made on any investment you sell is also tax free if it is held within an Isa.
Given the best cash ISA interest rates are around 1.30 per cent, there seems little incentive to max out your allowance. Instead, you may want to use it up with a stocks and shares ISA or increase the size of your existing investment portfolio.
Using your Lifetime ISA allowance (LISA) of £4,000 per year, with its generous 25 per cent government bonus, could offer a greater reward than topping up a regular cash ISA too. Your LISA contributions make up part of your overall £20,000 ISA allowance, but note the money must be used for a first home or retirement, otherwise it incurs a 25 per cent withdrawal penalty on the whole balance.
Contributing to a pension for your retirement is the most tax-efficient form of saving. Every time you top up your pension, you benefit from tax relief on your contributions at the highest rate of income tax you pay.
If you pay tax at the basic rate of 20 per cent, for example, you will receive 20 per cent tax relief on the money you pay into your pension. For higher earners the allowance is reduced.
You can put up to £40,000 a year into your pension and benefit from tax relief. You may also be able to bring forward unused allowances from the previous three years.
There are also other benefits to topping up before the end of the tax year. By sacrificing more of your salary to your pension it can help to move you into a lower tax bracket and protect your entitlement to child benefit which begins to reduce when you earn £50,000 or more.
It can also help you protect your personal allowance of £12,500 which reduces if you earn over £100,000 a year.
The capital gains tax (CGT) allowance is £12,000 in the current tax year. Married couples have a combined allowance of £24,000.
If you sell an asset, such as an investment or a buy-to-let property, £12,000 of the gain is tax free. Your gain is the sale price less what you paid for it. Any portion of the gain above your allowance is taxable.
Smart investors make the most of their allowance by selling a portion of their investments or assets each tax year so as not to lose the allowance or exceed it in another year.
You could reinvest the money into funds, trusts or shares held inside an ISA wrapper which are then exempt from CGT when you sell them in the future. This in turn helps to contribute more to your ISA allowance too.
After death, inheritance tax (IHT) of 40 per cent is charged on estates worth £325,000 or more.
By gifting up to £3,000 a tax year, you can legitimately move money outside your estate without penalty. If you didn’t use your allowance last year, you can back date the gift by one year, so you could gift £6,000.
Married couples and civil partners could back-date gifts by up to £12,000.
An estimated 2.4 million qualifying couples are missing out on this little-known tax perk. If one person in the couple is a basic rate taxpayer and the other is a non-taxpayer, the lower earner can give their partner or spouse £1,250 of their unused personal tax allowance saving them £250 in tax.
You can back date the unused allowance for the four previous tax years which means if you make the claim before the end of this tax year, you could be entitled to up to £1,150.
*Accurate as at April 2020 for a stocks and shares Lifetime ISA.