Tax: 5 things to tell your clients

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Tax: 5 things to tell your clients
Tax advice can help Britons invest more efficiently. (Pexels/Magda Ehlers)

Tax year-end is approaching but millions of Britons still lack understanding about how to mitigate tax. 

According to Barclays Wealth, Britons lack basic tax knowledge, such as which income bracket they fall into, which makes it difficult to understand how to use investment wrappers tax-effectively.

In a recent survey commissioned by Barclays Wealth among 3,000 UK adults, there was "persistent confusion" around upcoming tax bills. 

Millions of people could be paying more tax than they need to, and widespread unawareness of how to minimise the effect of tax. 

The survey analysed people with varying incomes: between £50,000-£100,000; between £100,000-£125,140 (where the ‘60 per cent tax trap’ comes in), and £125,140 and over.

Key findings included:

  • One in three (30 per cent) of those earning over £50,000 do not know their current tax bracket.
  • A quarter (27 per cent) of those with an income over £100,000 do not know the threshold for needing to complete a self-assessment tax return.
  • Half (50 per cent) say they will now need a financial adviser to prepare for higher tax bills.

Clare Francis, director of savings and investments at Barclays Wealth, said: “However, while tax may seem complex, there are a number of simple steps you can take to ensure you make use of the allowances available to each of us every year, which can help reduce the tax you pay.

"Things like using your Isa allowance and increasing your pension contributions can all help and over time, make a significant difference to the tax you pay.”

Here, UK financial advisers discuss five ways in which Britons can make the most of their tax allowances before the tax year ends on April 5 and new tax allowance charges come into effect on April 6

1) Maximise ISA savings and using investments wisely

UK adults can save up to £20,000 in an Isa, or up to £9,000 in a Junior Isa each tax year. Any returns are free from capital gains tax and income tax so it is important taxpayers take full advantage of these allowances on savings.

According to Edward Grant, director of technical connection at St. James’s Place, this is a great way to help Britons "build their financial futures".

He said: "Investments can shelter from dividend tax and capital gains tax by holding them in tax-efficient wrappers, such as a pension or stocks & shares Isas."

Each tax year, £20,000 can be paid into an Isa or, if clients can tie up their savings until age 55 (57 from 2028), they can pay into a lifetime pension.

Grant adds: “The current pensions allowance is £40,000 annually, or 100 per cent of income if one earns less than that.

Using your Isa allowance can ... make a significant difference to the tax you pay.Clare Francis, Barclays Wealth

"If one has already fully funded an Isa or pension, it is worth talking to a financial adviser to look at the different options available, such as a pension for a spouse, child, or grandchild, or explore Isas for families."

While cash Isas are available, the personal savings allowance lets basic-rate taxpayers earn £1,000 in savings interest tax free, and higher-rate taxpayers can earn up to £500 in interest before they need to worry about tax.

Grant added: "This means that depending on circumstances you may be better off preserving Isa allowance for stocks and shares.”

2) Using capital gains tax allowance

From the next tax year commencing on 6 April 2023, the capital gains tax allowance is being slashed by over half to £6,000.

Therefore, taxpayers should make full use of the £12,300 annual allowance before the policy changes comes into effect.

3) Reviewing pensions

Grant said taxpayers should ensure they access all the benefits available on pension pots, but it can be complicated to follow without an adviser, as the levels and bases of taxation and reliefs from taxation can change at any time.

He explained: "In the recent Budget, the chancellor proposed enhancements to pension annual contribution levels and the lifetime pension fund allowance.

"The benefits of these changes will be dependent on individual circumstances, therefore it is worth seeking professional advice to ensure you are maximising the opportunities effectively."

4) Reducing inheritance tax

The latest figures from HM Revenue & Customs have revealed a £900mn increase in IHT receipts, compared with the same period in 2022.

As reported by FTAdviser earlier, £6.4bn has been collected between April 2022 and February 2023.

Figures also published by the Office for Budget Responsibility last November predicted IHT receipts would rise to £7.8bn by 2027/2028. 

Darran Harrison, wealth planner for the Kingswood Group said: "Many strategies can be used to help minimise exposure to IHT, which is payable on the balance of the estate above the available tax-free allowances, at a rate of 40 per cent.

"There is no IHT payable at all, whatever the value of the estate, on property left to a widow or widower. Leaving a donation to a qualifying charity can also help reduce the inheritance tax payable.

"Planning ahead is key and making financial gifts to make use of annual allowances will also assist in reducing the size of the estate for IHT purposes."

Who would rather the state get their assets when they die rather than their loved ones?Jason Hollands, Evelyn Partners

He points to investing cash into pension plans, especially with the recent removal of the pension lifetime allowance; using life insurance policies and trusts, which he says are all "useful tools in conjunction with a professionally drafted will".

Taxpayers can reduce the IHT their families will pay on estates by making use of annual exemptions and gifting up to £3,000 (single) and £6,000 (couple) before 5 April 2023.

Because the individual IHT threshold (nil rate band) has been frozen at £325,000 since April 2009, and is set to remain at this level until 2028, advisers have urged their clients to focus attention on passing wealth onto the family, not the Treasury.

Jason Hollands, managing director, corporate affairs, for Evelyn Partners, commented: "This long freeze in the IHT nil rate band will also coincide with the period when the post-war baby boomer generation start to pass away. Hence the bonanza for the Treasury.

"Ultimately, with careful planning an IHT liability can be reduced or eliminated entirely. In truth, who would rather the state get their assets when they die rather than their loved ones?"

5) Take advantage of dividend allowance

Grant added: “It is important that taxpayers make the most of the benefits available on dividends before April 5 2023. The tax-free dividend allowance (currently £2,000) will halve for the tax year starting April 6 2023.

"Tax allowances work on an annual basis. This means that any allowances not used before 5th April can be lost with new tax regulations applying to each tax year."

There are notable exceptions are pensions and the IHT gifting allowance. Carry-forward rules enable people to use any unused pension allowances from the past three years, and any unused annual IHT gifting allowance from the previous year.

This means a couple giving for the first time could legally give £12,000 tax free to their family beyond the end of the tax year.

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