3. Increase your pension contributions
A pension offers you a tax-efficient way to save for your future.
Contributions you make to your pension will benefit from tax relief; this effectively means the money you’ve paid in tax is added to your retirement savings. As your pension is typically invested, the tax relief could grow further.
Tax relief is available at the highest rate of Income Tax you pay. If you’re a basic-rate taxpayer, it will usually be claimed automatically on your behalf. If you’re a higher- or additional-rate taxpayer, you will need to complete a self-assessment tax form to claim the full amount you’re entitled to.
Keep in mind that you cannot access your pension savings until you reach pension age, which is 55, rising to 57 in 2028.
4. Save in a tax-efficient way
Most people don’t pay tax on the interest they earn on savings.
The personal savings allowance (PSA) is the amount you can earn in interest without paying tax on it. How much the allowance is depends on what rate of Income Tax you pay:
- Basic-rate taxpayers: £1,000
- Higher-rate taxpayers: £500
- Additional-rate taxpayers: £0
It’s estimated that the PSA means 95% of people don’t pay tax on their savings. If you’re among the 5% that could be liable, moving your savings to a tax-efficient wrapper makes sense. Each year you can add up to £20,000 to an ISA. You do not pay Income or Capital Gains Tax on interest or returns from investments held in an ISA.
5. Use dividends to create an income
If you hold dividend-paying investments or are a business owner, you may be able to use dividends to boost your income without having to pay Income Tax.
The Dividend Allowance means you can receive up to £2,000 in dividends in the 2022/23 tax year before tax is due. If you exceed this threshold, you will be liable for Dividend Tax, and the rate may be lower than your Income Tax rate.
A bespoke financial plan can help you reduce tax liability
Depending on your circumstances, there may be other steps that you can take to reduce your tax liability. For example, if you’re self-employed, you may be able to deduct some expenses from your tax bill.
Please contact us to discuss your options and create a plan that will help you get the most out of your income and assets.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The FCA does not regulate tax planning.