Watching your money grow is great, paying tax on those gains can hurt. But in a few simple steps you can legitimately reduce the tax you pay – keeping more (if not all) of your profits for you.…
We all want to make more of what we’ve got, financially-speaking, especially right now. With the cost-of-living biting, every penny counts, so reducing the tax you pay on your gains is a crucial part of the equation. And the good news is that with the right sort of investment account for your money, you can do just that.
1. Remember we each have a tax-free allowance
For this tax year the standard amount you can earn tax-free is £12,570. And it’s currently set to stay at this amount for each tax year until April 2026.
What it means for your finances is that the first £12,570 you earn is tax-free, whether that’s from employment or other types of income held outside of a tax-free account.
You also have access to your capital gains tax free allowance of £12,300 each year which can be used against any capital gains you generate outside of a tax-free account. However, this allowance will go down to £6,000 from April 2023, and £3,000 the year after.
2. Use your tax-free ISA allowance
Invest within a tax-free account, such as a Stocks and Shares ISA. Savers can invest up to £20,000 each tax year in an ISA. Any interest or investment gains made within it are tax-free, making an ISA your first port of call for anyone looking to reduce the amount of tax they pay with flexible access when you need it.
That £20,000 is also per person, so a couple can invest up to £40,000 a year between them, without paying tax on the gains, no matter how great those gains grow over the years.
And you don’t have to start big. Investing little and often with a regular savings plan is a great way to build up savings over time.
3. Get your kids saving tax-free too
Children also have an ISA allowance. The Junior ISA allowance is not as much as the adult ISA allowance, but it still allows children under the age of 18 to have up to £9,000 invested on their behalf each year within a tax-free wrapper.
They cannot get access to the money until they are 18, so with diligent saving from birth, parents and grandparents can help give their children and grandchildren a good start to their future.
More on Junior ISAs
4. Pop it in your pension and take the perks
Think longer-term and the tax perks are even greater. The annual pension allowance enables you to save as much as £40,000 or up to 100% of your annual earnings every year (if it is lower).
Basic-rate taxpayers get 20% pension tax relief on pension contributions, higher-rate taxpayers can claim 40% pension tax relief and additional-rate taxpayers can claim 45% pension tax relief, boosting your savings and making your pension one of the most tax-efficient ways to save.
Basic rate tax relief is added automatically, but you need to claim higher rate reliefs back yourself via self-assessment.
And it’s well worth it. If you’re a higher-rate taxpayer then you may be able to claim back a further 20% or 25%, making pension saving even cheaper. For every £10,000 you save into your SIPP you could find it only costs you £6,000 or even as low as £5,500, if you’re a higher or additional rate taxpayer. Make sure you claim by 31 January for the previous tax year.
Don’t forget ‘carry forward’ too, which allows you to contribute more – using unused allowance from the previous three years – and still keep all the tax benefits that come from pension savings.
Most pensions allow you, from the age of 55 (57 from 2028) to take up to 25% of your savings as tax-free cash. One note of caution though, if you take more than the 25% tax free amount, then, for any future contributions, your annual allowance is replaced by the Money Purchase Annual Allowance (MPAA) – meaning you can then only invest up to £4,000 a year into your pension. The rule was created to stop people from trying to avoid tax on current earnings or gain tax relief twice, by withdrawing pension savings and then paying them straight back in again.
5. Help your kids build a retirement nest egg of their own
As the saying goes: it’s “time in the market,” rather than good “market timing” that pays off in the long run. In other words, keeping money invested for a long time is as important as the investments you choose. And a Junior SIPP does just that.
You can save as little as £20 a month into a Fidelity Junior SIPP on their behalf, which will be topped up by 25% by the government, boosting their savings even more. Showing them how their money is growing year-on-year will teach children the benefits of regular investing and could kick-start a positive savings habit. Just remember they cannot access their money until they reach age 55, rising to 57 in 2028. And probably even later by the time today’s tots are eligible to draw their pensions.
Important information – tax treatment depends on individual circumstances and all tax rules may change in the future. You cannot normally access money in a SIPP until age 55 (57 from 2028). This information is not a personal recommendation for any particular investment.
For further information on your personal tax position , contact Ascentant Accountancy who are based in Derby (01332 981920, firstname.lastname@example.org) and Ripley, Derbyshire (01773 424009, Ripley@ascentant.co.uk), call us to see how we can assist.