Top tax tips from HSBC
With the Tax Year end fast approaching (April 5th), HSBC has identified some ‘top tax tips' to help people be more tax efficient.
1. Is your tax code correct?
Your tax code determines what tax is deducted from your pay, and is printed on salary slips. It is important that it is correct, otherwise you could be paying the wrong amount of tax. Your notice of coding comes with a leaflet about your tax code, so it's definitely worth spending time reading and checking to ensure you understand and agree with it.
2. Use Your Family's Tax Allowances
If your partner is on a lower income tax band, you could consider making a gift of some of your taxable interest bearing savings and investments into their name to make full use of their personal tax allowance and lower income tax rate.
3. Use your Individual Savings Account Allowance
This year's ISA allowance is £10,200 for the over 50's and £7,200 for the under 50's. No tax is paid on either interest or capital gains. Up to £3,600 (£5,100 if you are over 50) can be invested in cash (typically a bank or building society savings account). Next tax year, the upper limit will be £10,200 for all age groups (£5,100 of which can be in a cash ISA).
4. Pension Allowances
Contributing to a pension is one of the most tax efficient ways of saving. Tax relief is available on contributions although there are complex rules for those with high incomes. It is therefore important that you take advice from an expert before investing in a pension.
5. Plan Your IHT Strategy
The inheritance tax (IHT) threshold is presently £325,000 per person. However, gifts made 7 years or more prior to death will not normally count for IHT purposes - and some gifts are completely exempt such as gifts to spouse or charities. It may be worth transferring some of your assets to your heirs whilst you are still relatively young.
6. Write a Will
This is the only way to ensure your estate goes to whom you intend and can help with your tax planning arrangements. Remember to take advice when planning your will. If you die without making a will, your chosen beneficiaries may not inherit, and the tax man may get more than your estate needed to pay with effective tax planning.
7. Release Capital Gains Slowly
The present capital gains allowance is £10,100 per year. If a potential large capital gain can be realised over two or more years you might be able to keep each year's realised gain below this threshold- this is known as smoothing out the gains. You may also be able to offset capital losses, even from previous tax years. At the present rate of 18%, CGT is lower than most income tax rates so it can be more tax efficient to take returns in the form of capital gains than income, especially for higher rate tax payers. Selecting the right type of investment is crucial.
8. Consider Taking More Income This Tax Year, Than Next
If you can choose the exact timing of when you receive your income and spread it out, it may well be beneficial to earn more before April 5th rather than the following tax year. The 50% tax band is being introduced next tax year.
9. Give to Good Causes
The Government gives tax relief on charitable donations. This is especially beneficial for higher rate taxpayers.
10. Using Trusts
There are a range of trusts which can be used to help with tax planning. For example, a protection (life assurance) plan written in trust can ensure that the proceeds on death are paid free of inheritance tax and without the need to wait for probate. These proceeds can be used for family purposes like paying for a funeral or mortgage, or for paying any inheritance tax due.
David Wells, Head of Investment, Insurance and Savings at HSBC comments: "An estimated £9bn in tax is paid out by individuals unnecessarily each year. Reducing unnecessary tax should be a priority for all households. When in doubt, taxpayers should contact the HMRC or seek guidance from a qualified Independent Financial Adviser. HSBC has a range of products which may be suitable, but it is essential to get individual advice."
"All political parties are in agreement that a major tightening of the Nation's belt is necessary over the next few years to reduce the huge burden of public sector debt. The likelihood of yet higher taxes, as well as the introduction of new taxes, is therefore almost certain.
"As Benjamin Franklin once said - nothing in this world is certain except death and taxes. The good news is that people are living longer; the bad news is that taxes are getting higher."