Meg Saksida highlights a selection of potential income tax savings to consider.
Another tax year end of 5 April comes and goes, and thoughts often turn to tax. Here is a selection of potential income tax savings ideas to consider, based on personal circumstances.
1. Contribute to your pension
Contributions to a personal pension are made out of taxed money. However, although the taxpayer puts in the net amount (e.g. 80% for a basic rate taxpayer), HMRC contributes the tax paid on the contribution, directly to the pension scheme. This allows the whole amount to be invested for the taxpayer tax-free; £80 from the taxpayer and £20 from HMRC. Once inside the pension, the investment grows free from income tax and capital gains tax. A UK resident under 75 and not already receiving a pension can generally contribute up to £40,000 from their earnings and obtain this tax relief.
2. Contribute to your partner’s pension
If the taxpayer’s partner is not earning, it is also tax-efficient to contribute into a pension scheme for them. If an individual is not earning, and they are UK resident, under 75 and not already receiving a pension, they can contribute up to £3,600 a year into a pension. The individual contributes (up to) £2,880 and HMRC the balancing £720.
3. Use your unused pension annual allowance
Still on the topic of pensions, make sure the capacity to contribute tax-free is not lost. If the taxpayer has the means and the total pension contributions have not reached £40,000 in the tax year, not only can they contribute up to that amount this tax year, but it is possible to use the excess that may be available from the previous three years too, on a ‘first in, first out’ basis.
4. Gifts to charity
Gifts to charity where the donor has signed a gift aid declaration are free from income tax. By gifting £80 to a charity out of taxed money, because HMRC pays the charity the other 20% the charity receives £100. For higher rate and additional rate taxpayers the tax bands are extended, meaning they obtain relief at their highest rate.
5. Transfer investments to your partner
Analysis needs to be made annually to ensure that the investments held within a couple are in the best proportion for tax purposes. Firstly, if funds are interest generating, and one of the couple does not have total earnings from trading, employment or property (ignoring their investments) to take them over £17,570 in 2021/22, the first £6,000 of the interest received will be tax-free. Even if they do have non-savings earnings above this amount, basic rate taxpayers should earn at least £1,000 interest and higher rate taxpayers £500 to take advantage of the personal savings allowance. If the investment income produces dividends, if possible, each partner should hold enough capital to generate dividends of £2,000 (i.e. the annual dividend allowance). This allowance is not means tested.
6. Transfer your personal allowance to your partner
The marriage allowance permits a basic rate tax paying couple to transfer 10% of one of the couple’s personal allowance to the other. This can be done simply online through HMRC, saving up to £252 tax annually.
7. Use your ISA allowances
Investing in ISA investments allows your income to grow tax-free. Whether the choice is for a stocks and shares or cash ISA, for 2021/22 capital of £20,000 can be invested (£9,000 for a junior ISA).
Practical tip
Ensuring the mix of investments and income between a couple is the most tax-efficient it can be, can save over £1,000 in income tax. In addition, making pension contributions boosts the eventual income of a couple in their retirement and making tax-free charitable donations strengthens personal values (and feels great!).
