It’s that time of the year when the nights are getting darker and spooky films start to appear on the TV. While the sight of ghosts, vampires, and more could frighten you, tackling your finances can be just as scary, especially if you’re making one of these five mistakes.
1. Failing to claim all the pension tax relief you’re entitled to
Tax relief is one of the reasons why saving into a pension makes financial sense for many. It means the government adds some of the tax you’ve paid into your pension pot to provide a welcome boost. But are you getting everything you’re entitled to?
Tax relief is usually paid at your nominal Income Tax rate. While your pension provider will usually claim tax relief for you, this isn’t always the case. If you’re a higher- or additional-rate taxpayer, you’ll also need to complete a self-assessment tax form to receive your full entitlement. It can seem like an extra chore, but it’s well worth it.
Take some time to review what’s going into your pension. Most workers should have three sums going into their pension each month: their own contribution, their employer’s contribution, and tax relief.
2. Paying tax on your savings when you’ve not used your ISA subscription
The Personal Savings Allowance means most workers don’t have to pay tax on the interest they earn on savings. However, if you have significant sums saved in cash or are an additional- or higher-rate taxpayer, you may pay tax on interest.
The Personal Savings Allowance means basic-rate taxpayers can earn up to £1,000 in interest each tax year before tax is due. This falls to £500 if you’re a higher-rate taxpayer, and additional-rate taxpayers don’t benefit from the allowance at all. If you exceed the allowance, you may need to pay additional Income Tax.
In some cases, paying tax is unavoidable but if you’re not making full use of your ISA annual subscription, you could be paying more than you need to.
For the 2021/22 tax year, you can add up to £20,000 to an ISA. You don’t pay tax on interest earned if you’re money is an ISA, helping it to go further.
3. Missing out on allowances that could reduce your tax bill
Are you making full use of allowances that could cut your tax bill? The rules around allowances can be complex and may depend on your situation so it can be difficult to understand which ones apply to you.
The Marriage Allowance is one example of this. It allows spouses and civil partners to transfer some of their unused Personal Allowance, the amount of income you can earn tax-free, to their partner. For the 2021/22 tax year, the Personal Allowance is £12,570 and you can transfer up to £1,260 to a partner. It can reduce your tax bill by up to £252.
Despite this, it’s thought that many couples are missing out on the tax break. If it’s something you’ve overlooked, the good news is that it can be backdated by up to four years.
If you’d like to discuss what allowances you can make use of to reduce your tax bill, please contact us.