Millions of Britons are caught in a high-tax trap, squeezed by outdated thresholds and rising incomes. The higher rate tax threshold, frozen since 2021, will continue to lag behind wages until 2028, leaving more and more people dragged into the higher band. This article delves into 10 end-of-year strategies to cut your tax bill.
Sarah Coles, head of personal finance, Hargreaves Lansdown, says “Painful tax traps have been set for millions of people this year. Your pay may not even have kept pace with inflation, but a rise may still have pushed you over a frozen threshold from basic rate to higher rate tax.”
“An awful lot of people are learning the hard way that stealth taxes can be the nastiest,” she says.
But, according to Coles, “When the taxman unleashes his sneaky seven tax traps, you can employ 10 brilliant end-of-tax year strategies to sidestep the traps and save significant sums.”
Some she suggests are versatile enough to help protect you from tax attacks on all sides. For the committed tax-saving family, you could shelter up to £183,760 from tax in the current tax year alone (assuming 2 parents earning at least £60,000 and two children).
Here Coles offers her tips:
- Pay into a pension
Higher-rate taxpayers benefit from tax relief at their highest marginal rate – which effectively extends the basic rate tax band by however much you pay in. As a result, it can push people out of paying higher rate tax altogether. If your employer offers a salary sacrifice scheme, you get even more of a benefit, because you don’t pay National Insurance on sums you sacrifice into your pension either. You can pay up to £60,000 into your pension this tax year, and carry forward unused allowances from the previous three tax years.
- Escape the high-income child benefit tax charge
The benefit of paying into a pension doesn’t necessarily stop there. It also reduces your adjusted net income*. If you are a parent earning between £50,000 and £60,000, cutting back towards £50,000 means you can reduce your high-income child benefit tax charge. If you’re earning just over £60,000, you may also be able to use the technique to cut at least some of the charge.
- Use pensions to deal with the £100,000 threshold
If you earn over £100,000, you’ll lose some of your personal allowance. Use a pension to reduce your income, and it will cut the amount of tax you pay at an eye-watering 60%. So, for example, if your income is £101,000 and you pay £1,000 into a pension, you get £400 tax relief, but you also take your income to the £100,000 threshold, so your personal allowance doesn’t taper – saving you another £200 in tax. It means that £1,000 contribution has effectively cost you just £400. Plus, if a parent can bring their income back under £100,000, they may keep their eligibility to tax-free childcare too.
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- Make use of your capital gains tax allowance
If you have investments outside an ISA, it’s worth considering taking advantage of your CGT allowance in every tax year. You can use the Bed and ISA process to move these assets into an ISA. Don’t forget, you can offset any capital losses you make during the tax year against gains. If your total taxable gain is still over the tax-free allowance, you may be able to deduct any unused losses from previous tax years. If just some of your losses reduce your gain to below the tax-free allowance, you can carry forward the remaining losses to a future tax year.
- Shelter as much of your income-paying assets in ISAs as possible
If you use the Bed and ISA process to shelter income-producing assets in an ISA, you won’t pay tax on dividends. The tax benefits on an ISA are cumulative, so you will benefit from the tax break in every year. In addition, because the rate at which you pay dividend tax rate is often higher than the rate at which you pay capital gains tax, it’s often worth prioritising this when making decisions about how to use your ISA allowance.
- Consider your cash ISA
A cash ISA can protect you from tax on your savings. You need to factor in the fact that cash ISA rates tend to be slightly lower than their savings accounts equivalents. However, if you have a large cash holding and are paying tax on your savings interest at 40%, you may be better off in a cash ISA. Likewise, if you are nearing the additional rate tax threshold, at which point the personal savings allowance is lost, by saving into a cash ISA now, you avoid the risk of paying 45% tax on all your interest when a pay rise takes you over the threshold.
- Plan as a couple
If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name. It means you can both take advantage of your tax allowances. You can also use all the tax-efficient vehicles at your disposal, including your ISAs and pensions, as well as the Junior ISAs and Junior SIPPs of any qualifying children. A couple who both earn at least £60,000, and have two children, can technically shelter £183,760 from tax in the current tax year.
- Consider your tax position next year
This is particularly key if you’re expecting to become a basic rate taxpayer next year – which often happens in retirement. Usually in this position, people will consider delaying receiving income or capital gains, so they pay a lower rate on them. However, this year the falling capital gains tax and dividend tax allowances will mean you’ll need to calculate whether this is still worthwhile.
- Make a charitable donation
This will cut your tax bill – although clearly won’t leave you better off overall financially. The charity will receive 20% in gift aid, and higher-rate taxpayers can claim back the other 20% through a tax return. You also get the benefit of knowing you have donated to a charity you care about.
- Consider a Venture Capital Trust
These aren’t right for everyone, because they are higher risk, so should only ever be considered as a small part of a large and diverse portfolio. However, if you use these schemes, in addition to the CGT and dividend tax saving, you can get up to 30% income tax relief on the amount you invest – which can reduce your overall tax bill.”
These are just a few of the many ways to reduce your tax bill. By taking advantage of these strategies, you can save yourself a significant amount of money.
This is just a general overview and you should always seek professional advice before making any financial decisions.
* Net adjustable income is your total taxable income before any personal allowances and less certain tax reliefs, including trading losses, donations made to charities through gift aid, pension contributions paid gross (before tax relief), and pension contributions where your provider has already given you tax relief at the basic rate. It’s complicated, but the key here is you can cut your net adjustable income by making pension contributions.”