The autumn statement which was announced last week has brought about changes to the tax system. Some taxes have gone up whilst others have fallen down. Most of these tax changes will begin to take effect from next April (beginning of tax year). The question on most peoples minds is how to save the most money possible. This article will aim to show steps you can take in order have a tax ‘free’ income of £45, 990; in theory at least!
1) Personal Allowance = £10, 500. The personal allowance threshold has increased from £10, 000 to £10, 500 meaning that you are able to earn up to £10, 500 without paying any tax.
2) Nisa Limit = £15,240. Your New Individual Savings Accounts has increased by £240 as of April next year. This means that you are able to save or invest up to £15, 240 without incurring income tax or capital gains tax. However, if you do invest in dividend paying stocks, you will be taxed at 10% for any dividends you receive. You can save funds which you need readily available in a cash ISA, funds that you need in the medium term in a fixed rate ISA or if you want to store funds away for a longer time and want higher growth on them, a stocks and shares ISA would be best.
3) Capital Gains = £11, 000. Capital Gains is a tax on the profit when you sell something (an ‘asset’) that’s increased in value. The current allowance for capital gains is £11, 000 meaning that you do not need to pay tax on capital gains below this amount. So if you buy shares and they go up in value (below the £11, 000 limit), you can take your profit tax free even if your shares were not in an ISA.
As Capital Gains are taxed separately to income, it is possible to generate regular streams of ‘gains’ from classes of investments that are subject to capital gains and not income tax thus maximizing your £11, 000 limit. One way to achieve this is by investing in zero-dividend preference shares, which are basically shares that don’t pay out dividends but instead provide a return of capital at a fixed redemption date. These shares are bought at a lower prices than the redemption value (value the company will pay you on a certain date) and thus you are able to calculate your gain in advance. Also, another tip to achieve capital gains rather than income for tax purposes is that when you buy into a fund, buy accumulated shares rather than income shares as these fall under the capital gain element. Although, accumulated shares do not pay a regular stream of income, they will grow faster over time as seen by the picture on the right.
4) Rent a Room Scheme = £4, 250. If you have spare room(s) in your main residence and you rent it out, the first £4,250 per annum you receive from your lodger is tax free.
5) Starting Rate for Savings Income = £5,000. This figure has increased drastically from the current level of £2, 880 and also the starting rate is being reduced from 10% to nill. This amount of £5,000 tax free income will generally benefit pensioners who only have modest pensions and not the general working public. This is because the starting rate is not available if taxable non savings income (broadly earnings, pensions, self-employed profits and property income) after allowing for the personal allowance(10,500) exceeds the starting rate limit. Thus you will only benefit if your income is below £15,500.
Another great tip for pensioners as well is that the new rules allow pensioners to draw money out of their pensions as and when they want with 25% of the sum withdrawn being tax free. The remaining 75% will be subject to income tax at the individual’s marginal income tax rate. As the personal allowance will be £10,500 as of April next year, there will be no tax to pay until income exceeds this figure. So one strategy pensioners could use is to take £10,500 of taxable income with £3,500 tax free lump sum each year and pay no tax at all because the taxable portion of the income is below the threshold for income tax. So you could get £14,000 per annum tax free every year could be paid out provided there is no other source of taxable income.
I hope this article has helped in showing how you could better plan your taxes and avoid overpaying. It is important to make the most of these exemptions and use the various tax wrappers offered to you in order to preserve your savings and grow your investments.