It is all too easy to pay too much tax. That’s the case for PAYE employees with relatively straightforward financial affairs, but the risk is highest for people with more complex finances because they own a business, invest in property, or are a high earner.
However, cutting your tax bill does not have to be difficult. Here are some ‘quick wins’ that can reduce your tax bill:
- Split your income between salary and dividends
If you own a sufficiently profitable company, splitting your income between salary and dividends can be one of the most effective ways of cutting your tax bill.
While salary payments are taxed at 20 per cent, 40 per cent, and 45 per cent above the basic, higher, and additional rate thresholds respectively, dividends are taxed at 7.5 per cent, 32.5 per cent, and 38.1 per cent for basic, higher, and additional rate taxpayers respectively.
At the same time, splitting income between dividends and salary means you can benefit from both the £2,000 dividend allowance and the £12,570 income tax personal allowance.
If your income fluctuates from year to year, it can also be worthwhile trying to spread it out more evenly across tax years by adjusting the salary and dividends you take. This can sometimes put you in a lower tax band and, allow you to pay a lower rate of dividend tax.
- Spread capital gains over multiple years
If you want to dispose of multiple assets, it can be worth doing so over multiple tax years to ensure you benefit from as much of your £12,300 Capital Gains Tax (CGT) annual allowance as possible.
A wide range of reliefs and allowances apply to CGT, so it’s worth taking advice on whether you can use any of these to offset your bills.
- Make sure you are using your ISA allowances
Back when they were introduced in 1999, Cash ISAs had an annual limit of just £3,000 with the combined limit for cash and stocks and shares ISAs sitting at £7,000.
Nowadays both the cash ISA and combined limits sit at a more generous £20,000 a year, allowing you to enjoy the gains tax-free.
- Increase your pension contributions
You can save plenty of tax by using your full £40,000 pension annual allowance, although this tapers off for those with a total income of more than £240,000 and there are strict limits for people who have flexibly accessed their pension pots.
The beauty of the allowance is that you pay no tax on every pound you put in up to the £40,000 limit.
You can also carry over any unused allowance from the previous three tax years.
How we can help
Although these four ‘quick wins’ are straightforward on paper, things can quickly get complicated in the real world because different taxes interact with each other.
At the same time, you could benefit from more sophisticated tax planning, such as by altering the way your business and finances are structured.
Speak to us today to find out how our tax specialists can help you.