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Many families have been forced to reassess their monthly budget and curb spending in 2020 as the pandemic has reduced household and business incomes. Yet whilst it may be necessary to reconsider any unnecessary expenditure during periods of financial constraint, one of the crucial areas many people forget to consider in their tax bill.
Reviewing your tax position could make an enormous difference to your take-home income, and the quieter moments of the Christmas break is often a good time of year to check through this. In this article, our financial planning team here at Cedar House offers some thoughts on how to check for tax optimisations as we approach the new 2021-22 financial year.
We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Check your tax code
Did you know that as many as 14.3m people in the UK could be on the wrong tax code, perhaps leading to hundreds of extra pounds paid to HMRC in unnecessary tax. However, it only takes five minutes to check via the government’s website to see if it is correct. It may be that you are due a refund and that your tax bill needn’t be as high from January 2021.
Check your marriage allowance
If you are married or in a civil partnership, then your spouse/partner may be able to transfer up to £1,250 of their unused personal allowance to you in 2020-21. This could be the case if you are a Higher Rate taxpayer, for instance, but your other half earns less than £12,500 per year. Transferring could save you both up to £250 – not an insignificant amount for a bit of work!
Tax-deductible expenses
Many UK workers in 2020 have been forced to work remotely due to lockdown restrictions. This means that many expenses previously covered by your employer in the workplace – e.g. water, internet and power – have now been picked up by workers. According to the UK government’s website, you can “claim tax relief for additional household costs if you have to work at home on a regular basis, either for all or part of the week. This includes if you have to work from home because of coronavirus.” Again, taking a bit of time over Christmas to review which expenses have been racked up since March 2020 could put hundreds of pounds back in your pocket.
See if pensions could mitigate your tax bill
One of the most powerful ways to save on tax – whilst also growing your retirement fund – is via pension contributions. In 2020-21, you can put up to £40,000 per year (or up to 100% of your salary – whichever is lower) into a pension and receive tax relief at your rate of Income Tax. In short, this means that the money you would have paid to the government in tax goes instead to your future retirement.
With some careful planning, therefore, a Higher Rate earner could make some big tax savings. Suppose you earn £60,000 per year, which in 2020-21 means £9,999 is subject to the Higher Rate of 40%. If you can afford to put this straight into your pension, you could save nearly £4,000 in income tax whilst opening the possibility of a higher income in retirement one day.
Examine taxes on your investments
Where there are investment returns to be made, there’s a government not too far away looking to tax it. Fortunately, there are some powerful options open to investors looking to mitigate their tax bill in 2020-21. For instance, consider your ISA allowance which, in the present tax year, lets you put up to £20,000 into investments which will not be subject to tax. So, if you have not yet used up your allowance and capital could be placed in this “tax-efficient wrapper”, think about speaking to your financial adviser about whether you could benefit from doing so.
Taxes on property
Landlords have faced increasing pressure on their profits in recent years, and events in 2020 have only ratcheted this up. If you rent out a property, therefore, make sure you make full use of the costs which you can deduct from your taxable income. For instance, if you pay a gardener or cleaner, face estate agent letting fees, service charges and ground rent, then these can all be claimed as expenses for the purposes of reducing your tax bill.
For those considering selling their rental property, it may be possible to mitigate your capital gains tax bill if you previously lived there for a significant amount of time. If the property used to be your home, for instance, then you could claim tax relief for the last nine months of ownership.
Conclusion & invitation
Here, we’ve offered just a handful of possible ways to mitigate unnecessary taxes in the 2020 Christmas break. There are many other options which a financial professional may be able to identify with you.
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.