Making the most of your tax allowances
As the end of the tax year approaches, it’s important to understand what tax allowances are available to you. Tax allowances can help you reduce the amount of tax you pay and keep more of your hard-earned money in your pocket.
Saving tax on your income
Personal allowance is available to everyone and allows you to earn a certain amount of money before you pay income tax. For the 2022-2023 tax year, the Personal Allowance has been frozen at the same level as the 2021/22 level which is £12,570. This means that you can earn up to £12,570 before paying any income tax! If you have not fully used this allowance, there could be an opportunity to draw taxable income from other sources to use any remaining allowance in the current tax year.
Linked to the Personal Allowance, is the Marriage Allowance. This allowance allows a husband, wife or civil partner to transfer an amount of their Personal Allowance to their spouse or civil partner, reducing their overall tax bill. For the 2022 to 2023 tax year, it could cut your tax bill by up to £252 in the tax year. To be eligible for the Marriage Allowance, one partner must have an income of less than the Personal Allowance, £12,570 and the other partner must be a basic rate taxpayer. For the 2022-2023 tax year, the Marriage Allowance is £1,260.
Saving tax on your investments
Have you heard of Individual Savings Accounts or as they are more commonly referred to as an ISA? They are a tax-efficient way to save and invest your money, as any interest or capital gained within the ISA wrapper is tax-free. For the 2022-2023 tax year, the maximum you can save in ISAs is £20,000, This amount has not changed since 2017-18 tax year. The benefit is that each year you can save or investment any sum of up to £20,000 in an ISA without paying any tax on the gains or interest. Over a period of time, this could be a very good financial planning tool for a majority of people.
In addition to ISAs, another tax-efficient savings vehicle are pensions. Contributions to pension plans are eligible for tax relief, meaning that the government will add money to your pension for every pound you save up to a certain amount, known as an annual allowance. For the 2022-2023 tax year, the annual (pension contribution) allowance is £40,000, or 100% of your earned income, whichever is lower, up to age 75 and assuming you have not accessed a pension flexibly.
It’s important to note that there could be the chance of catch-up contributions from previous years unused allowances. You can make contributions to make up for the unused allowances if your income is sufficient to do so or if your employer is very generous.
Everyone has different financial goals and using a financial adviser to help you navigate which tax allowances are good for you to use . You’ve got until 5th April to use these allowances, or you’ll potentially lose them.
Your money (capital) is at risk when you invest so taking expert advice is crucial to make sure you understand how it all works. Get in touch with us [email protected] we are here to help.