April 6 marks the start of a new tax year and one that will be defined by higher taxes, high inflation and a continuing squeeze on household budgets.
It will herald an additional 1.25 per cent of national insurance payments and rising energy prices bolstered by geopolitical uncertainty caused by Russia's invasion of Ukraine.
To combat this the chancellor earlier this month announced he would raise the national insurance threshold at which the tax becomes payable by £3,000 to £12,570, same as income tax. He will also lower the basic rate of income tax to 19 per cent, but not until 2024. The NI change takes effect in July.
Read: Spring Statement 2022: What advisers need to know
So what should savers do as we head into the new tax year?
1. Check your PAYE tax code
The tax code is the identifier that tells an employer how much tax should be deducted from people's salaries when they get paid.
Thomas says: “It’s important to check your tax code. If you have multiple employers or pension providers, you may get more than one tax code.
"If you’re on the wrong one, you could be paying HM Revenue & Customs more than you ought to be. On the other hand, you risk getting penalised if you’re paying too little."
2. Transfer part of your personal allowance
Married couples and registered civil partners are permitted to share 10 per cent of their personal allowance between them.
The unused allowance of one partner can be used by the other, meaning an overall combined tax saving.
The amount people can transfer in the current tax year is £1,260 but transfers are only available to those on the basic rate of income tax.
3. Tax-free savings and dividend allowances
For 2021-22, savings income of up to £1,000 is exempt for basic rate taxpayers, with a £500 exemption for higher rate taxpayers. The tax-free dividend allowance is £2,000 for all taxpayers.
"Married couples and registered civil partners could save tax by ensuring that each person has enough of the right type of income to make use of these tax-free allowances," says Thomas.
Wills and estate planning can be very complex areas, and you should ensure you speak to a certified wealth planner to ensure you understand what’s right for you.George Thomas
4. Contribute to your Isa and Junior Isa
Savers should start putting money in their Isa and Junior Isa early and benefit from tax-free capital gains and income, says Thomas.
“You can put the entire amount into a cash Isa, a Stocks & Shares Isa, or a combination of both.
“The fund builds up free of tax on investment income and capital gains until your child reaches age 18, when the funds can either be withdrawn or rolled over into an adult Isa. Relatives and friends can also contribute to your child’s Jisa, as long as the limit is not breached."
For adult Isas the contribution limit next year remains at £20,000, whereas for Jisas it is £9,000.
5. Utilise any capital losses
If capital gains and losses are realised in the same tax year, the losses are offset against the gains before the capital gains tax exempt amount is deducted. The exempt amount for 2021-22 is £12,300.
"Capital losses will be wasted if gains would otherwise be covered by your exempt amount," says Thomas. "You could consider postponing a sale that will generate a loss until the following tax year, or alternatively realising more gains in the current year."
6. Maximise pension contributions
The annual allowance for pension contributions before a tax charge is incurred is currently £40,000.
It is possible to carry forward unused allowances from the previous three tax years, as long as the amount does not exceed 100 per cent of the taxpayer's earnings.
But savers need to be aware of the money purchase annual allowance, which takes effect if they have started to take money out of their pension plan. This is currently £4,000, after being reduced from £10,000 in 2017.
The annual allowance is also reduced for taxpayers who have 'adjusted income' over £240,000 a year, when it reduces by £1 for every £2 earned over that threshold.
7. Pay pension contributions to save NI contributions
Thomas explains: “If you pay pension contributions out of your salary, both you and your employer must pay NICs on that salary. When your employer pays a contribution directly into your pension scheme, the employer receives tax relief for the contribution and there are no NICs to pay – a saving for both you and your employer."
The process is called salary sacrifice and sees the employee forego part of their salary or bonus to make a bigger pension contribution.
It’s important to check your tax code. If you’re on the wrong one, you could be paying HM Revenue & Customs more than you ought to be.However, reducing earnings via salary sacrifice can impact entitlement to income-related employer and government benefits and so may not be appropriate for everyone, warns Thomas.
8. Make a will and review it
When dying without a will, a person's assets are divided between their relatives according to the intestacy rules.
The surviving spouse or registered civil partner may only receive a portion of the estate, and inheritance tax will be due at 40 per cent on anything above £325,000, or up to £500,000 if the residence nil rate band is available.
9. Consider leaving some of your estate to charity
If a person leaves at least 10 per cent of their net estate to charity, the IHT on the remainder is charged at 36 per cent instead of 40 per cent.
But Thomas cautions: “Wills and estate planning can be very complex areas, and you should ensure you speak to a certified wealth planner to ensure you receive professional advice to understand what’s right for you and your situation."
10. Make use of IHT-free gifting and exemptions
Under the IHT marriage exemption parents can each gift £5,000 to their children in consideration of the marriage, free of IHT. Grandparents can also make an IHT-free gift of £2,500 for a grandchild’s wedding and registered civil partnerships attract the same exemptions.
Furthermore, the marriage exemption can be combined with the £3,000 a year IHT exemption. This allowance can be carried forward for one year if unused.
“Remember, you and your spouse or registered civil partner can each give £3,000 out of your capital every tax year, in addition to gifts you make out of your regular income,” says Thomas.
On regular gifting, he says: "As long as you establish a pattern of gifts that can be shown to be covered by your net income, without reducing either your capital assets or your normal standard of living, these gifts will be free of IHT."
The recipients of the gifts in this case need not be the same people each year.
carmen.reichman@ft.com
