Understanding Your Tax-Free Allowances

Tax Free Allowance

Tax can be a minefield of constantly changing regulations – it can sometimes feel like there’s tax rule waiting to trip you up at every turn. But there are tips and tricks available to help you minimise the amount of tax you pay and save you money.

Get yourself an ISA

Ordinarily you need to pay tax on any profits made from investments. But ISAs let you shield your investments and savings from the tax man. There’s no tax on any interest, income or capital gains from cash or investments held within an ISA. You could save up to £15,240 tax-free in the 2016/2017 tax year – and even better, the limit is £20,000 from April 2017. So, get saving!

Lifetime ISA = free cash

A Lifetime ISA, or Lisa, is a shiny new savings option announced by former chancellor George Osborne back in March 2016. Primarily designed for first-time house buyers and pension savers, the Lisa is designed to reward long-term savings. The maximum you can save in any one year is £4,000, but the government will whack a generous 25% on top, taking you up to £5,000 – just like that! The catch? Well, there are a few: you have to be 40 or under to open an account, and if you withdraw the money before you’re 60 and don’t spend it on your first house then you’ll lose the 25% bonus.

Pick up a pension fund

It might not feel like it’s benefitting you today, but a pension is perhaps the single most efficient way of saving money while minimising your tax bill. Paying through a company pension scheme often means you can contribute without paying tax. And when the time comes to draw on your pension pot, the first 25% is available completely tax free.

Capitalise on your Capital Gains Tax allowance

Capital Gains Tax is due when you make a profit on the sale of an asset – for example a second home or shares. It might sound like bad news, but in fact you have a generous tax-free allowance of £11,100 per financial year.

Use the tax year to your advantage

As the £11,100 Capital Gains Tax allowance applies per tax year, it makes sense to split any sales of assets across tax years in order to use allowances from two concurrent years. You could sell a second home in March (the last full month of the tax year) and then sell shares in April (once the new tax year has begun).

Spread assets between you and your spouse

If you’re married or in a civil partnership, you have the option of moving £1,100 of personal allowance from one partner to another, resulting in a potential saving of up to £220. Be careful though, there’s only a benefit if one partner is in a lower income tax bracket. You can use the same idea for Capital Gains Tax: spreading ownership between you and your spouse doubles the £11,100 tax-free allowance to £22,000 per tax year.

Check you’re on the right tax code

As you move between jobs and your income changes, it’s possible your tax code could be wrong. Call HMRC to double check. It’s worth it – you may be paying too much tax.

Conquer cashflow

If you’re running a small business or are self-employed, cashflow can be a daily concern. Choosing an accounting period that terminates early in the financial year can help increase the distance between earning your profits and having to pay tax, easing cashflow worries.

Rent a room in your house

As of April 2016, the tax-free threshold for renting a room in your own home went up from £4,250 to £7,500 …so find a lodger and start earning! There are plenty of websites out there that will help you find the right tenant.

Gift exemptions

Every parent wants to give their children a degree of financial security, but heavy-handed inheritance tax regulations can make that difficult to achieve. However, if you live for at least seven years after having sent the gift, it won’t be included in any inheritance tax calculations. For younger families, Children’s Bonus Bonds and Junior ISAs are great tax-free savings vehicles that help you give money to your children without giving it to the tax man at the same time.

Written by Richard Buck independent financial advisor at Flying Colours.