The key to success with being as tax efficient as possible is to think about it now. Don’t leave it until sometime in the future. As you will see from this blog, there are strategies you can put in place which will make a big difference to you financially. So why wait?
Are you a Higher Rate Taxpayer?
The first thing you have to know is which tax band you are in.
Remember to include all your income. Have a think of every single type of income you receive. This could include:
- Employed income
- Self Employed income
- Rental income
- Air bnb rental income
- Partnership income
- Interest received
Total it all up and look at the rates below to see the band you fall into before you start looking at how to become more tax efficient.
Income Tax rates and bands
Up to £12,570
£12,571 to £50,270
£50,271 to £125,140
If you earn over £120k, your personal allowance is reduced by £1 for every £2 you earn over £100k. Therefore, if your taxable income is £120k, your personal allowance will be reduced to £2,570.
Here’s how you work it out:
Personal allowance = £12,570
£120k-£100k = £20k (on £120k, you receive £20k over £100k)
Personal allowance reduced by £1 for every £2 over £100k = (20,000/2) x 1 = £10k
Personal allowance if your income is £120k = £12,570 – £10,000 = £2,570
You do not get a Personal Allowance on taxable income over £125,140.
When you look at this table you can see why it’s important to do some planning now – otherwise you could lose a significant amount of your salary in tax. But don’t be blinkered and only look at maximising how you become more tax efficient – remember your own financial goals. It’s another opportunity to consider how you can change things to help you get to where you want to be.
Items to take account of
Remember the marriage allowance, if applicable. If one of you doesn’t earn enough to use up all of his/her allowance, then 10% of their personal allowance can be transferred over to the other spouse.
Payments on account
The total tax due is made up of two elements:
- A settling-up payment for the previous tax year.
- A payment on account, which is 50% of your estimated current year tax bill.
If you think your profits for 23/24 are likely to be lower than 22/23, you can ask for it to be reduced prior to submitting your tax return.
As a basic rate taxpayer, you can earn £1,000 of savings interest per year tax free. For higher rate taxpayers, this decreases to £500.
If you receive any dividends on shares that you own, then be aware that there is a tax-free dividend allowance of £1,000 (£500 in 24/25).
Basic rate taxpayers pay tax at 8.75% on dividends.
Higher rate taxpayers pay tax at 33.75% on dividends.
Child benefit and earning more than £50k
Here are the steps you need to take:
- Check your annual income on your P60 or your personal tax account.
- Include any taxable benefits, for example, medical insurance, company car or accommodation.
- Use the Child Benefit tax calculator.
This year I have had a few clients who’ve been caught out with this one. It’s worth keeping an eye on your income otherwise it can be a shock! Have a look at the website.
How you can reduce your taxable income to be more tax efficient
There are several ways that you can be more tax efficient by reducing your taxable income which include:
- Gift aid
- Salary sacrifice
Saving money into a pension reduces your salary for income tax purposes. The contribution limit for the 23/24 tax year is 100% of your annual earnings or £60k – whichever is lower. Remember this £60k includes contributions made by you and your employer.
Tax relief is paid at the same rate you pay income tax.
A 20% tax payer would only need to pay £8k into a pension to make a £10k pension contribution.
You might also want to consider increasing your pension savings before 5/4/24 as and use any unused annual pension allowance from the previous 3 years.
The disadvantage of making pension contributions is that your money is tied up until the age of 55. This will be something else you will need to take account of when you are planning.
If you invest within a Stocks & Shares ISA (Individual Savings Account), all of the capital gains, dividend income and interest are tax free. The ISA allowance is £20k per person. When you have used up your own allowance you could deposit money into a Junior ISA – the allowance is £9k per annum. But take care as on the child’s 18th birthday, all of the money in the Junior ISA becomes theirs!
Donating through Gift Aid enables the charity to claim an extra 25p for every £1 donated.
Donating £100 means the charity can claim 25%, which will increase the donation to £125.
It is also beneficial for you if you’re a higher rate taxpayer as you can claim back the difference between your tax rate (40-45%) and the basic rate (20%).
Using the £100 example:
You can reclaim 20% of £125 (40%-20% = 20%) and thereby reduce your tax bill by £25.
This is a possibility if your employer offers a salary sacrifice pension scheme.
Here are some advantages:
- Your salary sacrifice won’t be subject to income tax or national insurance contribution payments.
- Your employer might continue to pay their national insurance contributions in full, with the element linked to your salary sacrifice also going towards your pension.
Going back to the personal allowance table, if you can reduce your salary in this way then you may be able to retain your personal allowance or at least some of it and then you may enter a lower tax bracket.
Of course, the downside of this is that you will have less money to live off so you will need to check that you can afford it!
As you can see, there are things that you can do to reduce the tax you pay, whether you’re a higher rate taxpayer or not. The key to being as tax efficient as possible is getting a plan in place now.
A word of caution – if you are deciding to look into making tax efficiencies, I would always recommend speaking to a Financial Planner. Good luck!
Anna Goodwin @2023 All Rights Reserved.