On the money: New Chancellor Kwasi Kwarteng has cut taxes in his ‘mini’ budget in a bid to boost growth
Millions of households will see a boost to their finances thanks to bold measures announced in Friday’s huge ‘mini-Budget’. Workers will get an uplift to their pay packets in November after Chancellor Kwasi Kwarteng reversed April’s 1.25 per cent National Insurance hike. Someone earning £30,000 will have £218 put back in their pocket, while someone on £50,000 will get to keep an extra £468 of their income.
Another boost is coming in the form of lower income tax rates, with the basic rate dropping by one percentage point to 19 per cent from April next year. The 45 per cent additional rate has been scrapped altogether – a huge boon for the highest paid workers.
But why stop there? There are plenty of clever ways to cut your tax bill yourself – some of which can boost your wealth by thousands of pounds. All it takes is a bit of time, planning and knowing where to start.
1) How to keep your savings tax free
All savers have a personal savings allowance, which means that basic rate taxpayers can earn £1,000 in interest without paying tax, while higher rate taxpayers can earn £500 tax free.
For more than a decade, this allowance has been more than ample to protect most people’s savings from tax. That is because interest rates on savings have been so low that you would have needed a huge nest egg to breach the allowance.
However, as interest rates are now rising rapidly, savers will have to watch out.
For example, Atom Bank is currently offering a top-paying interest rate of four per cent on a two-year fixed rate savings account. A basic rate taxpayer would breach their allowance if they had more than £25,000 in this account. A higher-rate taxpayer would breach it with savings of anything over £12,500.
This is where cash Isas really come into their own. These allow savers to deposit up to £20,000 every tax year without paying a penny of tax.
Cash Isa rates were lagging behind ordinary savings accounts, but they are now starting to catch up. The best easy-access Isa is currently paying 1.75 per cent and is offered by Gatehouse Bank.
2) Cut your tax bill by giving to charity
When you give money to charity using Gift Aid, the donation is completely tax free. The charity is able to claim the tax back from Revenue & Customs. That means for every £100 donation you make, the charity is able to claim back another £25.
However, if you are a higher-rate taxpayer you can personally claim back some tax as well. Since you pay 40 per cent tax and the charity will claim back 20 per cent in Gift Aid, you can claim back the remaining 20 per cent.
For example, if you donate £100 to charity, they claim £25 in Gift Aid and you can personally claim back another £25. You can make the claim on your self-assessment tax return, or phone Revenue & Customs to request it.
3) Now cut your spouse’s tax bill
Married couples can cut their combined income tax bill by passing their personal allowance between them. You can transfer £1,260 of your personal allowance every year – which amounts to a tax cut of up to £252.
The personal allowance is currently £12,570 and this is the amount that anyone can earn without paying a penny of income tax. Now let’s say that you earn £11,500 a year and your partner earns £20,000. You could transfer £1,260 from your personal allowance to your partner. That means that your partner can cut the amount on which they pay income tax by that amount. Between the two of you, you’ll pay £214 less in tax. You can backdate claims by four years, amounting to a maximum saving of £1,242. You can check if you’re eligible and if you could save money by phoning the Revenue & Customs income tax enquiry line, which is 0300 200 3300.
4) Make gifts to loved ones
Families paid a record £3billion in inheritance tax last year – twice as much as just ten years ago.
But there are a number of steps you can take to bring the bill down on your estate.
First of all, there may not be any tax to pay anyway. Individuals can leave up to £325,000 tax free, and married couples can combine their allowances. If your estate comprises a family home worth up to £1million, it can be passed down with no tax to pay. Secondly, you can take action during your lifetime to bring down a potential bill. For example, you can make gifts of up to £3,000 a year tax free. You can also give as many gifts of up to £250 per person each year as you like. You can also give £5,000 to a child who is getting married or starting a civil partnership, or £2,500 to a grandchild or great-grandchild, or £1,000 to any other person.
Paul Barham, partner at global accounting firm Mazars, says: ‘There is another useful rule, which allows you to gift as much of your income as you can afford to, providing you don’t deprive yourself in the process. The beneficiary will not have to pay inheritance tax on the gift after your death.’ Keep a record of gifts you make in this way.
5) Earn tax free cash on the side
If you rent out a room occasionally, make money by selling on eBay or babysitting, there is a special tax break for you. If you earn under £1,000 in a tax year from this kind of so-called side-hustle, you don’t have to declare or pay any tax on it.
6) Get free money to save for your future
Pension contributions are a golden ticket if you want to keep more of your money. That is because you do not have to pay any income tax on the money you save into a pension.
So, if you are a basic rate taxpayer, every £80 you contribute to your pension is topped up by the Government to £100. If you are a higher-rate taxpayer you need only pay in £60 to get £100 in your pension pot. Employers are also required to chip into the pots of workers, making pension contributions an extraordinarily effective way of saving.
7) Hold on to child benefit
Families are entitled to child benefit, so long as neither parent earns more than £60,000. Once this threshold is breached, the benefit is withdrawn.
Child benefit is worth £21.80 for the eldest or only child and £14.45 for every additional child.
However, if one parent earns more than £50,000, they may have to pay all or some of the child benefit back. If they earn more than £60,000 it is lost altogether.
However, there is a trick that could mean that high earners do not have to give up child benefit altogether.
Dominic McLoughney, director at Becketts FS, says: ‘You may be able to make additional pension contributions to lower your take-home pay.
‘That could get you under the threshold for losing child benefit. If done correctly, a parent earning £60,000 could save as much as £6,836 this tax year.’
8) Finally, pass on your pension
Pensions can be a tax-efficient way of passing on wealth as they are not included for inheritance tax purposes when adding up the value of your estate.
Furthermore, if you die before the age of 75, your children can inherit your pension savings with no inheritance tax to pay. If you are over 75, they will pay income tax on it.
Joshua Gerstler, chartered financial planner at The Orchard Practice, says: ‘The current pensions lifetime allowance is £1,073,100 so a husband and wife could save £858,480 of inheritance tax by maximising their pensions over their lifetimes.’
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