Protecting your wealth from tax is often a very important part of your financial plan. If you can reduce the amount of tax that you pay, you can keep more of your wealth. As a result, it may be easier to meet short-term financial obligations and save for the future.
However, managing your tax costs may be more difficult right now. According to the Independent, the UK tax burden is set to reach a post-war record high, despite recent tax cuts announced in the 2023 Autumn Statement.
Consequently, it may be more important than ever to consider what tax you are likely to pay and how you can potentially reduce it. However, this can be challenging as there are many taxes to consider and, depending on your situation, some may be more relevant than others.
One in five taxpayers could pay a higher rate of Income Tax by 2027
It is likely that you will pay Income Tax if you are still working. Even if you are retired, you may still pay Income Tax, depending on how much you draw from your pension and other savings each year.
Unfortunately, you may be likely to pay more Income Tax in the near future as a result of frozen tax thresholds.
In the 2022 Autumn Statement, the chancellor announced that Income Tax thresholds would remain frozen until April 2028. Yet, according to the Office for National Statistics (ONS), average wage growth between July and September 2023 was 7.7% meaning more of your income could be pulled into the taxable range.
As reported by MoneyWeek, this effect – known as “fiscal drag” – could mean that there are 2.1 million more higher-rate taxpayers and 350,000 extra additional-rate taxpayers by 2028.
Fortunately, you may be able to reduce the Income Tax you pay in several ways. These include:
- Increasing pension contributions
- Using salary sacrifice
- Making use of the Marriage Allowance.
These are just some of the ways to potentially mitigate a large Income Tax bill. However, each situation is different so working with a professional adviser could be beneficial.
The Capital Gains Tax Annual Exempt Amount will drop to £3,000 in April 2024
You may pay Capital Gains Tax (CGT) on profits you make from selling or otherwise transferring ownership of an asset. These assets include:
- Stocks and shares outside of an ISA
- Property that is not your main home
- Business assets
- Other valuable personal possessions (jewellery or paintings, for example).
In the 2023/24 tax year, you have an Annual Exempt Amount of £6,000. This means that the first £6,000 of profits you earn from selling or transferring ownership of assets is not subject to tax. You may have to pay CGT on any profits beyond this.
The Annual Exempt Amount is set to halve to £3,000 in April 2024. As a result, you may be more likely to pay CGT in the future.
Fortunately, you can still benefit from the £6,000 Annual Exempt Amount until the end of the 2023/24 financial year. So, it may be worth considering when you sell assets if you want to reduce CGT.
Additionally, you and your spouse each have your own Annual Exempt Amount and you can often pass assets between you without a CGT charge. Making full use of both allowances could help you mitigate a large tax bill.
Finally, stocks and shares in an ISA are not subject to CGT. As such, you may want to use your full ISA allowance – £20,000 in 2023/24 – before buying and selling stocks outside of this effective tax wrapper.
Dividend Tax could harm your investment returns
Investing can be an effective way to build your wealth for the future. However, it is important to consider whether you are likely to pay Dividend Tax and how this could affect your returns.
In 2023/24, you can receive up to £1,000 in dividends without paying any tax on them. Any dividends from non-ISA investments that exceed this allowance will likely be subject to Dividend Tax.
The rate you pay depends on your marginal rate of Income Tax. You could pay:
- 75% if you are a basic-rate taxpayer
- 75% if you are a higher-rate taxpayer
- 35% if you are an additional-rate taxpayer.
You may be more likely to pay this tax in the future because the Dividend Allowance is falling to £500 in April 2024.
If you are not careful, this could significantly affect your investment returns and make it more difficult to reach your long-term goals.
One of the most effective ways to avoid this is to use a Stocks and Shares ISA as you do not pay tax on any dividends from those investments.
You may also benefit from transferring investments to your spouse to make use of both of your Dividend Allowances. However, it’s important to ensure that you consider the potential CGT implications of this to ensure that you are being as tax efficient as possible.
Inheritance Tax receipts reached £6.1 Billion in 2021/22
Although no changes have been announced yet, many are hoping for an overhaul of Inhertance Tax (IHT), which is often considered an unfair tax. It’s particularly contentious at the moment as the number of people paying IHT is on the rise.
The “nil-rate bands” – the amount you can pass on before paying IHT – have been frozen until 2028. However, your income may increase, and you could see growth on your savings and investments in the coming years.
Indeed, the latest figures from the UK government revealed that they raised £6.1 billion from IHT in 2021/22 and this could be likely to increase in the future.
It is important to consider this so you can pass on as much of your wealth to your family as possible. The good news is, there are several ways to potentially reduce IHT including:
- Lifetime gifting
- Trusts
- Increasing pension contributions
- EIS and SEIS investments.
The earlier you start planning for IHT, the easier it may be to protect your wealth and reduce the tax that your family pays. However, some aspects of this can be challenging, especially using trusts, so you may want to seek professional advice.
Get in touch
For advice on how to protect your wealth email us at advice@milstedlangdon.co.uk.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.