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22 May 2023
Childcare and financial planning - a parent's guide for 2023
The Chancellor has announced an expansion of free childcare for children aged ...
With living costs rising across the UK in 2022, many households are understandably looking to save money on their monthly expenses. Cutting back on discretionary spending can be a good strategy, yet many people overlook their tax plan. Saving on needless taxes could be equally - perhaps more - effective to ease strain on your budget. Below, our team at Punter Southall Aspire outlines five ideas to help lower your tax bill and reduce the impact of inflation on your finances.
1. Double-check your tax code
With living costs rising across the UK in 2022, many households are understandably looking to save money on their monthly expenses. Cutting back on discretionary spending can be a good strategy, yet many people overlook their tax plan. Saving on needless taxes could be equally - perhaps more - effective to ease strain on your budget. Below, our team at Punter Southall Aspire outlines five ideas to help lower your tax bill and reduce the impact of inflation on your finances.
Every year, millions of people pay more in tax due to being on the wrong tax code. This is the code used by the government to determine your National Insurance (NI) and income tax liability on the PAYE (pay as you earn) system. If you have one job or pension, most people will be on the 1257L code. Yet Be aware that HMRC has said that it is your responsibility to check you are on the right code - they will not do it for you.
You might end up on the wrong code, for instance, by getting placed on “emergency tax” after changing jobs. This taxes all of your income above the basic Personal Allowance and is meant to be temporary. However, things can go wrong (e.g. if your employer fails to notify HMRC). You can check your tax code easily on your P45 or by contacting your HR department.
If you have been overtaxed, then you can contact HMRC to claim a rebate (which could be worth £100s, perhaps a lot more).
2. Reduce child benefit charges on higher income
For those with a child, a child benefit charge is levied if one - or both you and your partner - have an adjusted net income over £50,000. If you are married, live together or are in a civil partnership then the person with the highest net income pays the charge. This is levied at 1% for each £100 of adjusted net income over £50,000; with the amount effectively brought to £0 once your income hits £60,000.
Child benefit can really help families (especially larger ones) manage their budget, letting them claim £21.80 a week for their first child and £14.45 a week for any children after that (up to 20 years old, if they are still in education/training). For a family with five children, for instance, this could be worth £4,138.2 per year.
As such, reducing your adjusted net income - by making charitable donations or contributions towards your pension - could see your child benefit charge lowered, or even eradicated , so that you could keep more of the original benefit.
3. Optimise your employment status
Are you employed, self-employed or both? Do you own a limited company? Your employment status can make a big difference to your tax bill (depending on your circumstances). Suppose you own two Buy To Let (BTL) properties and earn a salary of £70,000 through your job. This puts £20,000 into the Higher Rate income tax bracket (40%) - setting aside any rental income you receive from your BTLs. However, one idea to potentially save tax is to place these into a limited company structure.
Doing so would make your rental income subject to corporation tax - much lower in 2022-23 at 19% than the 40% Higher Rate. Also, certain expenses on your BTLs can now be deducted - saving you even more. However, you do need to bear the disadvantages in mind when making this move. In particular, selling your BTLs would mean that profits are no longer free of capital gains tax (CGT) up to £12,300 in a given tax year, for example. There are also other costs with running a limited company - such as legal fees and annual auditing - which can erode income.
4. Make your investments tax-efficient
Each tax year, you are entitled to a range of tax allowances. Many people do not use them to their full advantage, which is money gone to waste. Each year, for instance, up to £20,000 can be put into your ISA(s) and any interest, capital gains and dividends generated inside will be free from tax. As one example, if you have a larger amount of cash in a general investment account (GIA), it may not be the best way to produce your returns - since much of your income and profits will be liable to capital gains tax (CGT) and/or dividend tax.
Moving your investments gradually into an ISA could be a good way to make this portfolio more tax-efficient. However, bear in mind that you are also entitled to a £12,300 CGT-free allowance each tax year, as well as £2,000 in dividends without tax. This helps you to save on tax in the shorter term whilst you make the transition.
5. Claim your full relief entitlement
This may not help your finances early in your career, but claiming your full tax relief on pension contributions will help boost your retirement fund - potentially giving you a better lifestyle when you finish your career. Employed Basic Rate taxpayers get 20% relief on their contributions by default under the PAYE system (via auto enrolment). However, those on the Higher Rate and Additional Rate will need to claim the extra relief (20% and 25% respectively) using their Self Assessment Tax Return, via a letter to HMRC. Also, if your employer offers to match your own contributions (normally up to a limit), then make sure you take full advantage of this - since it effectively doubles your contributions!
Contact your adviser if you have any queries about your tax planning.
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