In recent months, the government has had to increase its borrowing due to the high cost of its pandemic response. According to figures from the Office for Budget Responsibility, published by the BBC, the government borrowed £355 billion in the 2020/21 tax year.
As you may have read in our Budget summary, the government may need to raise taxes in the near future to cover their expenses. Thankfully, if you want to minimise the amount of tax you pay, there are some things you can do. Read on to find out three ways to beat the proposed tax rises.
1. Make sure you’re using your ISA allowance
One of the proposed changes in March’s Budget was a freeze in the Capital Gains Tax (CGT) exemption, which is set at £12,300. This can potentially pose an issue as, since it isn’t rising in line with inflation, you may have to pay more tax as a result.
One way that you can deal with this is by ensuring that you’re using your full ISA allowance, which is £20,000 for the 2021/22 tax year. This is a tax-efficient way to save, as any returns on an ISA are paid free of CGT.
On top of this, if you’re saving into a Junior ISA on behalf of your children, you can pay up to £9,000 per year. This means that a family with two children can effectively save £58,000 per year without having to pay tax.
The two most popular types of ISA are:
Cash ISAs are a popular savings product as they are essentially very similar to a traditional savings account, but you don’t have to pay tax on the interest you earn. However, interest rates for Cash ISAs are typically low, which means that the interest on your contributions may not keep pace with the rate of inflation.
Stocks and Shares ISA
As the name would suggest, with a Stocks and Shares ISA you can invest in the stock market to grow your wealth. Bear in mind, however, that while the potential returns may be greater than with a Cash ISA, your capital is also at risk.
2. Work with a financial adviser to avoid breaching the Lifetime Allowance
Another significant proposal in the Budget was the freeze in the pension Lifetime Allowance at £1,073,100. If you have significant pension savings, breaching this limit could result in a tax charge.
If you want to be sure of having a comfortable and sustainable lifestyle in retirement, it can be important to ensure that you aren’t paying any more tax than you have to.
A key way of doing this is to carefully monitor your pensions to ensure that you don’t go over the limit. If you have too many workplace pensions to easily keep an eye on them all, you may want to consider consolidating them.
If you want to further reduce the risk of exceeding your Lifetime Allowance, it may be beneficial to seek professional advice. Working with a financial adviser can help you to manage your pension arrangements in a more tax-efficient way, so you can prevent any unnecessary charges from eating into your savings.
3. Use your spouse’s allowances if you have used up yours
One of the many benefits of marriage is that if you have used up your allowances for the tax year, you may be able to use some of your spouse’s too, which can save you money in tax.
For example, one way to tackle the Capital Gains Tax exemption freeze could be to split your assets with your partner, allowing you to effectively double your allowance.
This means you can make up to £24,600 in gains without having to pay tax on the amount, compared to only £12,300 for yourself.
However, if you intend to capitalise on this then it’s important to avoid the tax pitfalls that you could stumble into. This is why it’s important to seek professional advice, as working with an adviser can help you to make informed decision and navigate any tax issues.
Get in touch
If you want to structure your finances to paying an unnecessary amount of tax, get in touch. Please email email@example.com or call 0115 933 8433.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts. The Financial Conduct Authority does not regulate tax advice.