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Is your tax bill higher than it needs to be? As many as 1 in 6 people pay more to HMRC than is necessary due to errors on their tax return. UK businesses also fall short, paying around £9.1bn more in corporation tax than they need to. In the first quarter of 2022, moreover, HMRC had to refund over £22m to pensioners who claimed back overpaid tax. Clearly, people are not always taxed perfectly in the UK. Nor does everyone take full advantage of their tax allowances and reliefs. This means there could be opportunities for your to improve your disposable income with some careful tax planning. Below, we share four ideas on how to do this. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
#1 Optimise taxes and childcare
Young couples often face greater pressures on their household finances as they contend with the cost of childcare (on top of their mortgage and bills). For a child under 2, the average cost of day nursery (50 hours) is currently £263.81 a week. Sometimes, the cost of childcare can wipe out one partner’s salary. As a result, many households still maintain a traditional split of gender roles to maintain stability – i.e. the father works full-time whilst the mother stays at home to raise the kids. However, this is not always the most tax-efficient way to do things.
Suppose a husband earns £60,000 per year and the wife does not work (she stays at home with the young children). Here, the former will see £9,729 of his earnings taxed at the Higher Rate of 40%. £12,571 to £50,270 will be taxed at 20%, and £12,570 will be tax-free under his Personal Allowance. Overall, the bill could be £11,431.40. However, suppose instead that the husband and wife both work part-time, with each person looking after the kids for two days each week.
Let’s assume that this brings the combined earnings of both partners to £60,000. Here, two sets of tax-free Personal Allowances apply (£25,140 combined), meaning that £34,860 is subject to the 20% Basic Rate; the Higher Rate does not enter the picture. In this case, the total income tax bill could be £6,972; not £11,431.40 in the case where just the husband works. Even when the cost of 1 day of nursery fees per week is factored in, this could represent a big saving.
#2 Check tax codes and bands
Martin Lewis from MoneySavingExpert has warned that millions of UK workers could be on the wrong income tax code, resulting in tax overpayments possibly amounting to £100s or £1,000s for individuals. This can happen, for instance, when you change jobs and you might be placed onto emergency tax. You can check whether your tax code is correct by referring to your pay slip and speaking with your HR department.
Another common mistake is overpaying on council tax, which as many as 862,000 people may be currently doing. If you have recently moved out of an area but paid your council tax upfront, for example, then you may be due a refund. Sometimes, properties are also “re-banded” which can lead to eligibility for a retrospective discount. You can check all of this fairly easily by using the government’s list of local councils.
#3 Use all of your self-employed tax tools
If you have a side-business or are self-employed, then make sure you claim all expenses and keep clear records of receipts (e.g. fuel, phone bill and home office costs) so your profits are not over-taxed. Other strategies include choosing an optimal time for the end of your accounting year. If you pick a date earlier in the tax year, then generally speaking you have more time to pay tax on profits. Remember, you can also carry losses from a previous tax year and offset these against profits in following tax years.
#4 Ensure investment tax-efficiency
Investments can form an important part of a person’s income (e.g. dividends). Taxes, of course, erode the value and returns that you might otherwise benefit from. Making full use of your tax allowance can be enormously helpful in this respect. In 2022-23, you can earn up to £2,000 in dividends without tax and up to £12,300 in capital gains without tax. If you think you will end up exceeding these thresholds in a given tax year, then take extra care to make use of your ISA allowance. You can put up to £20,000 into your account(s) each tax year and all capital gains, dividends and interest generated from the assets inside will be tax-free.
Be careful not to focus too much of your ISA allowance on cash. Cash ISAs do not offer better interest rates compared to regular savings accounts in 2022-23. Moreover, most people need to earn over £1,000 in interest before they need to start worrying about paying tax on their interest (which requires a significant amount saved in cash due to today’s historically-low rates). Rather, consider using more of your ISA allowance for investments such as stocks and bonds.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk