Five ways to be tax savvy
Are you paying more tax than you need to?
1. Use your full ISA allowance
Any income or gains you receive from investing in ISAs are exempt from income tax and Capital Gains Tax. The total amount that you are allowed to invest in an ISA each year cannot be carried forward to future tax years. So to make the most of this tax-efficient investment, check that you've subscribed your full ISA allowance of £11,520 by the end of the tax year on 5 April 2014.
Up to half of this allowance, £5,760 can be subscribed to a cash ISA. The remainder, or the full amount, can be subscribed to Stocks and Shares ISAs with the same or another provider.
This saving can be significant because outside an ISA, higher and additional rate taxpayers would have to pay tax at a rate of 40% or 45% on the interest their savings earned this tax year.
2. Think about your pension
The annual allowance for pensions is £50,000 although this allowance will reduce to £40,000 from 6 April 2014. This allowance is the maximum tax-relievable amount you can invest in a pension during a pension input period. A pension input period is the time period over which the amount you put into your pension each year is measured against the annual allowance.
However, you may be able to offset some contributions that you make above the maximum amount. These can be offset against unused allowances from the previous three years, as long as you were a member of a UK registered scheme during this time.
Basic-rate taxpayers enjoy income tax relief at 20% and tax payers who pay more than the basic rate receive income tax relief at their highest marginal rate. If you are a higher-rate taxpayer, you can receive 40% or even 45% tax relief this tax year on the contributions you pay - so the attraction of paying in to a pension is clear.
However, this is a complex area and we recommend you take professional advice before making pension contributions. For details of Independent Financial Advisers in your local area, visit unbiased.co.uk, the national trade body for financial advice.
3. Effects of moving into a higher tax band
You'll always receive your Income Tax Personal Allowance, unless your income is more than £100,000 in the tax year.
If your income exceeds £100,000 your income tax personal allowance is currently reduced by £1 for every £2 of income in excess of that amount.
Making payments into pensions can help to reduce your taxable income, mitigating exposure to higher tax rates and the erosion or loss of your income tax personal allowance.
4. Utilise your partner's tax status
Thinking practically is key when it comes to personal finance. If you're liable to a higher rate of tax than your spouse or registered civil partner, transferring investments and savings into their name could reduce the tax you pay as a couple.
To ensure that such a transfer is effective, you should seek advice from a professional tax adviser before proceeding.
5. Plan around inheritance tax
Inheritance tax (IHT) is charged at 40%* on estates that exceed the IHT threshold, or nil rate band, which is currently £325,000.
* From the 6 April 2012, a reduced rate of IHT of 36% was introduced where 10% or more of the net estate is left to charity.
Two key ways to reduce the taxable value of your estate are to spend capital and income, or to make gifts from capital or income.
Some gifts are exempt from IHT such as those made between a married couple or registered civil partners. In addition, wedding presents to children or grandchildren and gifts to charities are exempt - within certain limits. Regular gifts from income are also exempt, provided there is no impact on the donor's standard of living. There is also an annual tax exemption of £3,000 available to each donor and you can also make small gifts up to the value of £250 to as many individuals as you like in any tax year.
Other outright gifts are potentially exempt. If the deceased gives away assets seven years before their death, the gift then becomes exempt from IHT.
Gifts to family trusts can also be an effective way to reduce IHT on death. Gifts to a family trust that do not exceed the nil rate band of £325,000 are not liable for IHT.
Please note, it is important to seek professional advice when contemplating the creation of a trust.
It is also important to bear in mind that you must be excluded from being able to benefit in any way from assets or money given away if the gift is to be effective for IHT purposes.
The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets. You should usually aim to invest over at least five years. For pension plans, any contributions will normally be tied up until you take your retirement benefits. Also, please be aware that the value of tax benefits will depend on your individual circumstances, and tax rules may change in the future.
Check if you qualify for advice with HSBC
If you have £50,000 or more in savings and investments, you may be eligible for HSBC Premier Financial Advice. See the full eligibility criteria.
If you don't qualify for HSBC Premier Financial Advice or if you'd rather not pay for advice, see other ways we can help.
We charge for our service - our fees vary depending on your individual needs. Your adviser will clearly explain our fees upfront and the type of advice we offer in your initial, no-obligation consultation.
Eligibility requirements
HSBC Premier Financial Advice is available to UK residents who have £50,000 or more in Savings and Investments and who are at least 18 years old at the time of the initial consultation.
You'll also need to have an HSBC Current Account or Savings Account for us to be able to deduct your fee. We can accept payment from a first direct Current or Savings Account too.
To find out more:
- See our HSBC Premier Financial Advice
- Call us on 0800 328 1298 to book an initial no-obligation consultation with an adviser. Lines are open Monday to Friday 8am to 9pm and 9:30am to 7pm on Saturday. (Textphone: 18001 0800 028 0126).
If you don’t qualify for HSBC Premier Financial Advice, or if you’d prefer not to pay for advice, see other ways we can help.
If you are not a UK resident, see our HSBC Expat service.
