There’s just one month to go before taxes are hiked again. April’s changes include a 50% income-tax band for high earners with salaries of more than £150,000. So minimising your bill is crucial. Fortunately, there are several simple ways to shield your cash from the taxman.
The first, and easiest of these, is to make the most of individual savings accounts (Isas). Every year you are entitled to put £7,200 (or £10,200 if you are aged over 50) – rising to £10,200 for everyone on 6 April – into one of these tax wrappers. This money can then grow free from further income- and capital-gains tax (CGT). For more information on how Isas work, and which one to pick, see this week’s special supplement.
Meanwhile, the government-owned National Savings & Investments Bank’s products also offers some useful tax breaks. Index-linked certificates, for example, allow you to invest up to £15,000 over three or five years, with interest (based on the retail price index +1%) received free of income tax. For gamblers, monthly prizes won on premium bonds are also tax-free, assuming your certificate comes up a winner.
Spreading assets around makes sense too. For example, a couple can reduce the tax on their savings income by holding investments in the name of whichever spouse enjoys the lowest tax bracket. And, in addition to the Isa allowance, everyone also gets a £10,100 annual capital-gains tax allowance. This is the amount you can make tax-free from buying and selling investments before you have to start paying CGT. So if you think you’re going to exceed this amount, transfer some of your assets to your spouse or civil partner before selling them and use their allowance too.
The tax relief on pensions means they will become increasingly attractive to high earners if taxes continue to rise. Pension contributions currently attract a 20% tax relief if you are a basic-rate taxpayer, or 40% as a higher-rate taxpayer.
From 6 April anyone earning over £100,000 should make the most of this. If you earn £110,000 and pay £20,000 a year into a pension, your taxable income will drop to £90,000 and you’ll regain your full tax-free personal allowance, says Justin Harper in The Sunday Telegraph. Otherwise, you lose the allowance at a rate of £2 for every £1 of income above £100,000.
But there’s a catch. “The government’s anti-forestalling rules mean that most people with earnings of £130,000-plus are restricted to a maximum annual contribution of £20,000 for higher-rate tax relief,” says Danny Cox of Hargreaves Lansdown in MoneyWise.