For many people, making the most of your tax allowances prior to the tax year end can be difficult to get to grips with. Trying to find an easy way to make use of every allowance can be confusing, and it can often lead to valuable tax saving options being left on the table
With the tax year ending on the 5th April 2019, it’s important that you move quickly to make the best tax saving you can. As we move towards the deadline, consider each of the allowances and see if they fit to your personal circumstances.
One of the most common forms of reducing your income tax payments is through a charitable donation. There are numerous ways to do this – you could donate directly through your wages or pension, known as Give As You Earn (GAYE), or you could do so by using Gift Aid. For GAYE, these donations are deducted from your salary before your employer calculates any income tax payable on your earnings. Your employer will then pass the money on to your chosen charity on your behalf. Gift Aid is for donations paid directly by you to a recognised charity and will be treated as if they were paid from your income after the basic rate of 20% tax has been deducted.
The charity then claims this money back from HMRC – meaning the charity gets more, but you don’t need to pay extra. If you happen to fall into a higher tax bracket, then you can claim back the amount that exceeds the 20% basic rate: so if you pay 40% tax, you could be getting as much as 20% of your donation back in tax relief.
Be sure to keep clear records of all of your charitable donations, though, as you’ll need to show proof when making a tax saving. You can read more about what HMRC expects of you to do when keeping records here.
Charitable donations are one of the most common options that you could turn to. They make it easy for you to contribute to a good cause that you feel strongly about, in exchange for paying less tax.
Pension allowances are another popular choice, giving you the chance to build up a strong private pension and get relief on your income tax payable all at once. The 2018/19 tax allowances are as high as £40,000 or 100% of your earnings – whichever number happens to be lower. So, if you happened to have a taxable income of £35,000 for this year but you put £39,000 into a pension pot, you would only get tax relief on £35,000 of that pension contribution. Be sure to read more about this on the HMRC website.
Keep that in mind, as some people expect a full tax saving on all their pension contributions. You can carry forward unused allowances from the last three years, so long as you were a member of the pension scheme during that time.
That being said, if you have a net adjusted income of £150,000 or over then you may see your allowance reduced to as low as £10,000, as it is tapered down depending on how much your net adjusted income exceeds £150,000. However, if your threshold income for the year is £110,000 or less, your allowance will not be reduced regardless of what your adjusted income is.
A lower limit of £4,000 may apply if you are already drawing money from a defined contributions scheme.
Everyone is provided with a tax-free personal allowance from the government of £11,850 for the 2018/19 tax year. This is the amount of any income you can receive for the year before you start to pay any tax on it. Anything above this though, will need to be taxed at the rate you pay. Also, keep in mind that you will see your personal allowance reduced if you happen to earn over £100,000. You can read more about that here.
If you earn over £46,351 you will pay a 40% rate of tax on those earnings, if you earn over £150,000 you will be expected to pay at a 45% tax rate. It’s important that you keep an eye on these income rate thresholds, as it could make it possible for you to make some significant savings before the tax year end.
Another very important way to make use of your tax allowances is to put some of your income into what is known as an Individual Savings Account, or ISA. These are very popular and offer you the ability to build up some tax-free savings moving forward. If you don’t already have an ISA, you should really consider starting one.
For the 2018/19 tax year end, you will be able to save as much as £20,000 in an ISA. You can pick from cash ISAs, stock and shares ISAs, lifetime ISAs and innovative finance ISAs, available through any bank or building society or other financial services provider. If you choose to start a lifetime ISA, then you can only pay in £4,000 per year and receive the tax-free benefits on this.
The key point of any ISA is that you do not pay any income tax or capital gains tax on any interest or returns you make from these.
MARRIED COUPLES AND CHILDREN’S ISAS
If you are married or have a civil partner, then you have a total ISA allowance of £40,000 between you. Also, there is a junior ISA allowance of £4,260 per year for any children. So long as your child lives in the UK and is under the age of 18, they will be eligible for this kind of ISA, unless they already have a Child Trust Fund.
FINDING THE RIGHT HELP WITH YOUR TAX ALLOWANCES
Of course, with the tax year end just around the corner you might be unsure where to turn – or where to start. Our team here at Devonshire Green can help you to make the right tax saving relative to your own position. From setting up ISAs for you and your partner (and children) to securing the right pension, we’ll help you to locate the option which suits your needs.