Having endured three lockdowns and with 2020s ‘Christmas is cancelled’ still ringing in our ears, there’s no doubt that many of us are looking forward to celebrating this year’s festive season in style. We don’t want to be party poopers, but before you get carried away with the merry-making, why not take a moment to think about your tax return?
In 2021, according to statistics, a staggering 1.8 million people missed the January 31 deadline, meaning they began accruing interest on any money they owed as well as the potential to be charged penalties. Filing early, on the other hand, could have meant benefits both to their wallets and their wellbeing.
All pros, no cons
Yes, we mean it, folks. If you file early, there are precious few downsides. This year 63,500 canny taxpayers filed theirs on – the earliest day to do so – but even if you file in December, not only will you still get that warm fuzzy feeling of having got ahead of the curve, but if you’re in line for a refund you may get that more quickly, even before Christmas, especially if you file online.
Knowing where you are financially means that you can plan for the year ahead more efficiently, perhaps spreading the cost of what you owe. And while any extra money could come in handy for seasonal shopping sprees, if you want to be a savvy saver there are a ton of other ways in which you can make that hard-earned cash work hard for you.
Make the most of tax-free allowances
An ISA or Individual Savings Account is a great way of investing money in a tax-free way and the annual allowance is currently £20,000. While you are not allowed to open more than one cash or stocks and shares ISA per tax year, couples can invest £40,000 between them.
Remember, there’s no Capital Gains Tax on sales or funds within an ISA. And this can usher in huge benefits. Not to mention when you take income. That’s tax-free too. Win-win.
Perk up your pension
And when it comes to pensions, the greatest gains are for higher rate taxpayers – especially if you earn more than £125,000 per year. That’s because you can pay into your pension while benefitting from a double whammy - getting your personal allowance back and reducing your income tax rate.
If you know anyone who falls into this category – why not share this blog and enlighten them about this sweet spot.
Pension tax relief number-crunching
A little bit of number-crunching for you now…
You can get 60% tax relief on your pension contributions if you earn between £100,000 and £125,140.
For example, if you earn £125,140 and make a gross pension contribution of £25,140, then you can:
- Regain your personal tax allowance, which gives you £12,570 more income tax-free.
- A pension contribution of £25,140 (including the basic tax relief) only results in a reduction to income after tax of £10,056.
- Yet you benefit from an increase in your pension of £25,140, which has only cost you £10,056 net after basic and higher rate tax relief.
- The difference of £15,084 gives you an effective tax relief rate of 60%.
- £15,084/£25,150 = 60% tax relief rate.
In a salary exchange model, the tax relief can be nearly 67%, assuming the employer NI saving is passed into the employee pension.
Calling all contributions…
On another note, does your employer match your contributions? If so, paying in a lump sum (the Government allows up to £40,000 annually) could give your pot a significant boost. And, if you’re an employer there is also the opportunity to offset contributions against profit and attract some corporation tax relief. What’s not to love?
It’s for charity, mate!
Another fine way of making good use of spare cash is by making charitable donations, which are tax-free if made by individuals. You can decide whether the tax goes to you or your charity of choice, depending on how you donate. If you’re donating from a limited company, you can benefit from lower corporation tax. It’s also worth remembering that if you leave 10% or more of the net value of your will to charity, IHT that can be paid at a reduced rate of 36% (instead of 40%).
On a side, but interesting note, in the last two decades, between two and five billion pounds have been received by HMRC every year – essentially from people who distrusted their heirs more than the government to spend their money wisely. Sad, but true. Not just the wealthy, but those with modest estates. And totally unnecessary - if you plan ahead wisely.
So, you see - getting that tax return in doesn’t sound quite so bad now, does it? And if you’re in any doubt about how you would like to maximise any refunded monies or plan for the future, simply book for a free 20-minute consultation with either Martin or Rob Wilcocks and we’ll be happy to advise you. Just click on our names to reserve your slot.
Martin and Robert Wilcocks
Award Winning Wealth Managers