The end of the current tax year is approaching fast. But just because several weeks will pass before we embark on the new 2022-23 tax year doesn’t mean we can afford to be complacent. Leaving tax planning until April 1st could cost you money. Planning, by definition, means devising a strategy in advance. In this article, we’ll examine some of the main ways to make our income and savings more tax efficient. Specifically, we’ll look at ISAs, Wills, Enterprise Investment Schemes and Pension Planning.
What is efficient tax planning?
Planning your taxes involves two processes –
- Making sure you thoroughly understand your financial position – your income, your expenditure and your investments.
- Putting in place a strategy that will ensure that all elements of your finances work harmoniously, enabling you to pay the lowest taxes legally possible. Tax planning isn’t only about where to place your earnings. It’s about timing too. Get this right, and you are well on the way to being ‘tax efficient’. Remember, there’s nothing wrong with paying less tax: the less tax you pay, the more financial freedom you have, either to spend as you see fit, save towards your retirement or even give it to charities and good causes.
Making the most of ISAs
- A good starting point is to utilise your ISA allowance. Currently, a UK resident can put away a maximum of £20,000 into an ISA (Individual Savings Account). This works with couples, who can, between them, save £40,000 into an ISA.
- Any gain you make from your ISA in terms of interest or capital will be free of tax up to a maximum of £12,300.
- For any children you have under the age of 18, you can invest up to £9,000 in a Junior ISA.
- Consider investing in With-Profits Funds. These funds can be held in the form of Stocks and Shares ISAs. These funds work so that the peaks and troughs of the stock market are smoothed out. During years of strong market performance, a proportion of the investment gains are held back to mitigate the effect of falling markets in weaker years.
Reviewing your Will
As part of your tax planning, try to consider the beneficiaries of your Will. They won’t have to pay any Inheritance Tax on any part of your estate that’s below the current £325,000 threshold. Neither will there be tax to pay on any amount that you leave to:
- your spouse
- your civil partner
- a charity
- a community amateur sports club
- gifts that you make more than 7 years before you pass
If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000. If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. Their threshold can be as high as £1 million. Any part of your estate that’s above the threshold will be subject to the standard Inheritance Tax rate of 40%.
The Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) allows you to deduct 30% of the amount you invest from your tax bill. For example, if you invest £10,000 in a qualifying EIS company, you will be able to deduct £3,000 from your tax bill. The potential drawback is that the EIS is designed to attract investment into younger ‘start-up’ businesses. These sorts of companies re quite risky, and there is no guarantee that these companies will grow – or even survive. In other words, the EIS is highly tax-efficient but almost always high risk. Always take professional advice before investing.
The most you and your employer can contribute to your pension in a single tax year is £40,000. However much you put in up to this limit, HMRC will top up to the tune of an extra 20%. In other words, if you pay £10,000 into your pension, HMRC will add a further £2,000 to your pension fund.
Comprehensive support on UK Tax Planning
Efficient tax planning may seem complex. However, if you take the trouble to plan your investments and taxes for the year ahead, you could save yourself a lot of money – literally thousands of pounds – over the short, medium and long term.
Always take specialist advice. Here at AccountsCo, we’re UK Tax Specialists. We cant advise you on which investments you should make, but we can support your UK Tax planning by giving you some pointers on the tax consequences of different types of investment., Please get in touch before the end of the tax year – We are here to help.
Tax Planning The end of the current tax year is approaching fast. But just because several weeks will pass before we embark on the new 2022-23 tax year doesn’t mean we can afford to be complacent. Leaving tax planning until April 1st could cost you money. Planning, by definition, means devising a strategy in advance. […]