We’re sure it hasn’t escaped your notice but we have just experienced the largest increase in inflation since 1981 of 9.1%. We’re seeing soaring food and petrol prices and a massive 54% increase in the energy cap with another increase forecasted for October. It is, therefore, not surprising that many UK households are feeling worried about the cost-of-living crisis and the financial impact.
As the economy tries to recover from a global pandemic, along with the effects of the Ukraine and Russia conflict, the taxman has dealt another blow with the recent increases in National Insurance Contributions and dividend tax.
In fact, depending on individuals’ circumstances, there are potentially eight ways they are paying more tax since April this year, these are:
- Increase in National Insurance Contributions
- An average rise in Council Tax of 3.5%
- The freeze on income tax threshold means more income tax
- Dividend tax has increased by 1.25%
- Recent inflation results in paying more VAT
- The rising cost of house prices means an increase in stamp duty
- Frozen Capital Gains Tax and higher house prices mean more tax for property investors
- More estates will pay inheritance tax after allowances frozen and not following inflation.
Unfortunately, these decisions are out of our control. However, if you are concerned about rising taxes on top of the cost-of-living crisis, then there are legitimate ways you can check to see if you can reduce the amount of tax you pay. This could save you hundreds or even thousands of pounds.
Check Your Tax Band
A good starting point, is to check that your current tax code is correct. Your tax code tells an employer how much tax to deduct from your salary and shows the personal allowance you can earn in a year before paying income tax.
Changing jobs, having multiple jobs, receiving taxable benefits, or even taking career breaks are just some of the reasons a tax code may be different or incorrect. If HMRC have old or incorrect details, then you may be paying too much tax.
Putting money into an ISA is a great tax-efficient and flexible way to save for your future. You do not pay any Income Tax or Capital Gains Tax within the fund, or on the money you may draw down as income, bonus!
However, you do need to remember that the Government puts a cap on how much you can put into your ISAs in any tax year. The allowance set for 2022/2023 is £20,000. If you are thinking about a Junior ISA for your children, then the limit for this tax year is £9,000.
Lifetime ISA for First Time Home Buyers
If you are between 18 and 40 and looking to get on the housing market, then opening a Lifetime ISA could reward you with an extra £1,000 per year.
A Lifetime ISA allows you to put in up to £4,000 per year, and with tax-free growth, the government will also add a 25% bonus to your savings up to a maximum of £1000.
One thing to consider is that your Lifetime ISA annual limit of £4,000 does count towards the annual ISA Limit of £20,000 mentioned above for the 2022/2023 tax year.
You can only withdraw money from your Lifetime ISA if you are; buying your first home, aged sixty and over or terminally ill.
Pension Tax Relief
Pension tax relief can be unbelievably valuable, but not everyone is claiming as much as they are eligible for. Additional rate (45%) and higher rate taxpayers (40%) can claim tax relief on pension contributions.
However, depending on the pension scheme they pay into, they may not automatically get the full amount of tax relief they are entitled to.
For example, in group personal pensions, group self-invested personal pensions or stakeholder pensions, everyone gets pension tax relief at 20% regardless of what they earn. Higher and additional rate earners would therefore need to reclaim the difference on their tax return (extra 20% or 25%).
If you are an additional or higher rate taxpayer, then we recommend checking your pension type to ensure you are claiming the correct tax relief.
Married Couples Tax Allowance
The married couple’s allowance is a tax relief that is underused within the UK. If one partner earns less that the personal tax allowance of £12,570, then they are entitled to transfer up to £1,260 of that allowance to their other half if they are a basic taxpayer themselves. This could reduce their tax by up to £252 in the tax year.
Split Dividends Between Spouses
If you own shares, then another consideration for married couples is to split the dividends between them. This could help you stay below the £2,000 tax free dividend allowance, helping to reduce the amount of tax you pay.
Home or Remote Working
With millions now working from home or remotely on a full time or regular basis, many are entitled to claim tax relief on a proportion of their household bills including utilities, insurance, and council tax.
The amount of tax relief you can claim is calculated on the number of hours work from home per month, but those who work from home for more than 25 hours per month can usually claim.
This can also include travel costs if your place of work is not permanent, or you need to travel to client’s location.
Hopefully this article gives you a few ideas on how you could reduce your tax liability. If you would like any advice or help on potentially reducing the tax you pay, speak to one of the friendly team at Face to Face Finance. We’d be happy to help!