5 useful ways to be more tax-efficient, after tax breaks fall by 6% in the last 10 years

A man working something out on a calculator

If you want to reach your long-term goals, it’s important to carefully manage your wealth to help it grow in the most effective way.

One of the key ways to do this is to ensure you’re taking advantage of all the tax allowances and exemptions you’re entitled to. No one wants to pay more tax than necessary!

However, this can be increasingly difficult as the government freezes allowances and removes opportunities to reduce your liabilities. According to data published in FTAdviser, government tax breaks have decreased by an average of 6% in the past decade.

If you want to build your wealth effectively, it’s important to make the most of the tax allowances you have. Read on to find out five of the most useful ones that can help you save money.

1. Use your Capital Gains Tax annual exempt amount

When you sell certain assets such as a second home or investments not held in an ISA, and make a profit from them, you may have to pay Capital Gains Tax (CGT).

In the 2022/23 tax year, you have a CGT annual exempt amount of £12,300. This means you can earn up to this much profit before any tax is due. If you go over this threshold, the amount you’ll have to pay depends on your other taxable income:

  • Standard CGT rate: 18% on residential property, 10% on other assets
  • Higher CGT rate: 28% on residential property, 20% on other assets

Making the most of your annual exempt amount can help you to reduce your tax bill. For example, you might want to crystallise a certain amount of gains each year or consider putting assets in joint names to effectively double the amount of gains you can make before tax is due.

It’s also important to bear in mind that this annual exemption doesn’t roll over, so if you don’t use it all by the end of the tax year (6 April to the following 5 April), you lose it.

2. Make the most of your ISA allowance

As you’ll know, Individual Savings Accounts (ISAs) can be a great way to grow your wealth as any interest or growth you earn will be paid free of CGT and Income Tax. Of course, because of this valuable benefit, there is an annual limit to how much you can pay into them.

In the 2022/23 tax year, you can deposit up to £20,000 into your ISAs, either purely into one account or by spreading your allowance across several different ones.

There are two main types of ISA that you may want to consider, these are:

  • Cash ISAs – These operate in a similar way to a traditional savings account, but any interest you earn on your money is paid tax-free
  • Stocks and Shares ISAs – This type of account allows you to invest your wealth in the stock market, with any returns being paid free from CGT and Income Tax. Of course, it’s important to note that this can potentially see stronger growth, but comes with inherent risk.

If you do plan to invest your wealth through an ISA, it can be useful to seek professional advice first, so you can do so in the most effective way.

3. Use your pension Annual Allowance to save for retirement effectively

If you want to enjoy a comfortable retirement, it’s important to build up enough wealth to support your desired lifestyle. This is why it can be helpful to make the most of the tax relief available.

As you’ll know, when you make a contribution to your pension, the government tops it up with the money that you would have paid in tax. Due to this, the amount that you can receive depends on how much tax you pay:

  • If you’re a basic-rate taxpayer, you’ll receive 20% tax relief on your contributions
  • If you’re a higher-rate taxpayer, you’ll receive 40% tax relief on your contributions
  • If you’re an additional-rate taxpayer, you’ll receive 45% tax relief on your contributions.

Each tax year, you have an allowance for how much you can contribute to your pension while still benefiting from tax relief. In the 2022/23 tax year, this stands at £40,000, or 100% of your earnings, whichever is lower.

Of course, it’s also important to bear in mind that you may be able to carry forward unused allowance from the previous three tax years. Making the most of this can help you to grow your pension wealth in the most effective way.

4. Drawing pension wealth as income can help to avoid the Lifetime Allowance charge

While tax relief can be useful, it’s important to remember that there is a limit for how much you can contribute to your pension over your working life. This is known as the Lifetime Allowance (LTA) and in the 2022/23 tax year stands at £1,073,100.

Of course, while this sounds like a lot, it could be easier than you think to breach this limit due to rising inflation. While wages, and so pension contributions, are increasing, in his 2021 spring Budget the chancellor froze the LTA until at least 2026.

If you exceed this limit, you could trigger a tax charge when you make withdrawals from your pension. This charge is 55% on any excess funds taken as a lump sum, or 25% if you take it as income.

This charge can eat away at your hard-earned wealth and may mean you don’t have as much in your fund. To avoid this prospect, it can be useful to access your pension in a tax-efficient way.

For a start, you could withdraw excess pension as an income, rather than a lump sum, as this would cut the amount of tax you have to pay on it. Alternatively, if you’re eligible, you could seek Lifetime Allowance protection, which could potentially raise your LTA up to £1.25 million.

5. You can gift assets to minimise your Inheritance Tax liabilities

Inheritance Tax (IHT) is one of the UK’s most-hated taxes and it isn’t hard to see why. After working so hard to build wealth for your loved ones, it seems unfair that the government should take up to 40% of it when you pass away.

According to government projections, in the near future the amount of IHT that Brits have to pay is set to rise sharply. Figures in by FTAdviser show that between 2022 and 2027, families are set to pay £37 billion.

If you’re worried about how it could affect your estate when you pass away, you may want to consider gifting some of your wealth to loved ones before you die. There are several useful exemptions you can make use of to cut your tax bill and leave more to your family.

One of the most important is your annual gifting allowance, which enables you to pass on up to £3,000 tax-free. It’s useful to note that this limit applies to individuals, so couples can gift up to £6,000 each tax year between them.

This allowance can also be carried forward one year, so it’s important to make the most of it. If you want to know more about how to reduce your IHT liabilities, read our previous blog to find out more useful tips.

Get in touch

If you want to know more about how you reduce your tax bill, we can help. Please email or call 01454 416653 to find out how.

Please note:

The value of your investment 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.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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