Avoiding tax traps – Five tips to help you on your financial journey

With the end of tax year fast approaching, if you haven’t already, now is the time to review your finances and ensure everything is in place. However, whilst doing so, it’s important to be prepared for unexpected tax traps.

1. Don’t get caught out by the 60% rate

If you earn £100,000 or over, your personal tax allowance is tapered away at a rate of £1 for every £2 you earn above £100,000. Once income exceeds £125,140 you lose the full allowance, with an effective tax rate of 60%. You can mitigate against this additional tax obligation by making full use of your pension allowances and reducing the earnings that fall into the higher bracket.

For example, let’s say you get a £1,000 pay rise that takes your taxable income to £101,000. Not only does paying that £1,000 into your pension take you back out of the 60% zone, but you benefit from the 40% higher-rate tax relief available on that contribution, which could also be topped up by your employer’s contributions. The maximum that you can contribute into your pension is the lower of 100% of annual earnings or £40,000.

Find out more about retirement planning

2. Remember to make use of your (and your family’s) ISA allowances

You usually have to pay tax on any income or capital gains you earn from your investments, however with an ISA, provided you stay within the contribution limits, capital gains and income made from your investments won’t be taxed. So it’s worth making sure you use your full ISA allowance for each tax year, which is currently £20,000 for 2022/23. Remember you can also make use of your partner’s ISA allowances, and contribute up to £9,000 into your child’s junior ISA.

Take a look at our ISA guide

3. Take into account the lifetime allowance

If your pension pot is anticipated to total more than £1m, make sure you’re up to speed with the lifetime allowance (LTA). The LTA is the limit on how much you can build up in pension benefits over your lifetime, without paying a hefty tax charge.

For most people, the LTA is £1,073,100 for 2022/23, and this has been frozen at this level until 2025/26. To avoid the LTA charge, it’s important to monitor the value of your pensions, and the increase in value of any defined benefit pensions. You should also consider applying for protection if your pension savings are expected to exceed the lifetime allowance threshold.

Read more about financial protection

4. Reduce your inheritance tax liability

There are a number of strategies and options you can explore to reduce your inheritance tax liability, these include gifting your money, utilising trusts, IHT friendly investments, insuring your money, or spending it!

We would recommend a combination of these tactics, but a financial adviser can support you with the decision.

Find out more about estate planning

5. Plan in advance – don’t leave it too late

Now is the time to take action. Don’t leave it too late as some opportunities may not be available after tax year end.

We understand that financial planning can sometimes seem daunting. A Fairstone financial adviser can help you to make decisions that work for you and your personal circumstances, meaning achieving your goals could be closer than you think.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. FAIRSTONE IS NOT A TAX ADVISER AND INDIVIDUALS SHOULD SEEK INDEPENDENT TAX ADVICE FROM A PROFESSIONAL TAX SPECIALIST. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.