Are you maximising your tax free allowances worth up to £55,750 this tax year?

Jun 19, 2019 | Tony Byrne's View

Did you know there is a date known as Tax Freedom Day?  It is a date given, by the Adam Smith Institute, which calculates the number of days the ‘average’ person would have to work just to pay off their taxes. In 2018 every penny the ‘average’ person earned up until May 28th, Tax Freedom Day, went straight to the taxman.

Bearing this in mind, it is incumbent on you, to maximise the many tax reliefs, allowances and exemptions that are available in the UK today.

There are over 1,000 tax reliefs, allowances and exemptions.  Hundreds of different tax rates, types and thresholds. Income is taxed at a higher rate than capital.  There are numerous personal income and capital allowances/reliefs. There is a multitude of the tax-efficient ISAs and pensions allowances.  TEE (where pension savings and returns are exempt from Income Tax, but pension income is taxed) vs EET (pension savings would be from taxed income, but with no further taxation thereafter) vs LISA (Lifetime ISA) and Inheritance Tax. There are concerns over awareness, complexity, administration, tax avoidance and who benefits.

Interestingly, in spite of the UK being one of the highest taxed countries in the world, it is still possible for an individual to take advantage of up to £55,750 worth of tax free allowances in the current 2019/20 tax year.

The following is the list of tax allowances, that make up the figure of £55,750.  Not everyone is entitled to every single allowance, but most taxpayers are entitled to claim the vast majority of them.

Capital Gains Tax exemption £12,000 Capital

ISA allowance £20,000 Income & capital

Dividend allowance £2,000 Income

Personal savings allowance £1,000 Income

Starting rate band £5,000 Income

Property and/or trading allowance £2,000 Income

Marriage allowance £1,250 Income

Personal allowance £12,500 Income

Total £55,750

So, instead of having a Tax Freedom Day in May, you could have a personal Tax Freedom Day in January, February, March or April instead!  Now, wouldn’t that be cool?

The UK tax system is one of the most complex ones in the world to comprehend. Even the genius Albert Einstein was once quoted as saying: “The hardest thing to understand in the world is the income tax”.

So, beware of the various tax traps for the unwary. The main ones to be conscious of are as follows:

  • The starting rate band of £5,000 is lost once your income exceeds £17,500;
  • The personal savings allowance is reduced, if you are a higher rate taxpayer (40% tax rate) and lost, if you are an additional rate taxpayer (45% tax rate);
  • The marriage allowance is lost, if the recipient becomes a higher rate taxpayer;
  • Child benefit is lost when income reaches £60,000 p.a.;
  • The personal allowance is lost when income reaches £125,000 p.a.;
  • The Tapered Annual Allowance reduces the maximum amount of £40,000 that can be paid into pensions, on which tax relief can be claimed, once adjusted income exceeds £150,000 p.a. Once adjusted income reaches £210,000 p.a. the annual allowance for pension contributions is reduced to a maximum of £10,000 p.a.;
  • If you start taking an income from a money purchase pension scheme the amount you can pay into a pension and still get tax relief reduces even further to £4,000 p.a.

There are some ways to plan to minimise the impact of these tax traps, which are summarised below:

  • You should maximise the use of allowances and exemptions between spouses/civil partner to remain within limits;
  • Consider transferring (savings and investment) income between spouses/civil partners to maximise tax efficiency;
  • Make increased pension contributions to extend the basic rate tax band and/or get higher rates of tax relief;
  • Ensure the right person claims Child Benefit in order to get annual National Insurance Credits to obtain qualifying years for the state pension;
  • Where possible, and relevant, reduce your income to below the key limits above especially the £17,500, £60,000, £125,000, £150,000 and £210,000 limits.

In my experience, minimising your personal taxation is one of the key ways to increase and preserve your wealth.  So, if you would like advice on how to invest your money tax efficiently why not get in touch with us? You know it makes sense.

 

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