Reviewing your tax situation once in a while is essential if you wish to manage your wealth and income you have worked so hard for. To do this, you may want to maximise incentives and increase your gains. Through this guide you will learn how to minimise your tax expense and maximise savings. Let’s get started.

Invest in more funds that pay dividends

Investing in funds that give you high dividend yields can be highly beneficial to you. This is because the first £2000 of payouts you receive from dividends are tax free. What’s more, if you receive more dividends above the capped limit, then it is taxed at a lower rate than what you would be taxed for a regular income.

However, if you are a company shareholder, you must consider evaluating how much of your income comes from your salary and dividends. Here are some things to note:

• The basic rate dividend tax for the financial year in 2022 is capped at 8.75%.
• If you are in the high tax bracket, then you would be paying 33.75% tax instead of 32.5%.

Contribute to pension schemes

If you have a high income and pay high taxes, you can save on the potential income tax by either giving charity or by making contributions to your pension fund. Individuals can contribute up to £40,000 every year into pension schemes.

Give charity

In regard to charity, gifting aid is an efficient method to save on taxes if you donate to registered charities. You may stand to receive some tax relief from the government for your charitable contributions. The gross gift raises the share of your income that is taxed at reduced rates by extending your basic rate band. A self-assessment tax return is the most straightforward approach to claim gift assistance payments.

Saving for children

To save for your children or grandchildren, consider investing in the Junior Individual Savings Account (JISA). While you can only contribute up to £4,260 every year, a JISA provides similar benefits to an adult individual savings account (ISA).

Children take control of their account as soon as they turn 16. However, you may still make contributions to the account till they are 18 years old. Do note, no money can be withdrawn from the account until they are 18. If you do not spend all of your JISA allowance in a given tax year, the rest does not roll over and is lost. The biggest benefit about a JISA is that multiple individuals can donate to it. So, many members of the family such as parents and grandparents can save for their children.

Individual Savings Account (ISA)

The ISA is a good alternative for individuals who have used up their pension annual allowance. This is usually beneficial to high paying taxpayers as you do not have to pay any income tax or capital gains tax on the gains you achieve from here.

Capital Gains Tax (CGT)

Thanks to the amount exempted annually, you are exempt up to £11,700 on the capital gains tax. Do remember, CGT is charged if your total earnings or gain in a tax year exceeds this amount. The good news is that the exempt sum will increase to £12,000 next year.

Another point to consider is that if you sell jointly held assets and earn a profit, you can use both of your allowances, but the exemption does not carry over from year to year.

Transfer of personal allowances

If you or your partner do not use up your personal allowance by the end of the year, both of you can jointly elect to transfer one’s unused allowances to the other. This way, the tax burdens can be reduced.

Give gifts

One of the brilliant ways to save on the inheritance tax is by giving gifts to family. When you die, 40% IHT is owed on a portion of your estate if it exceeds a certain amount, which is £450,000 per person or £900,000 for a couple. By giving gifts regularly, you can easily diminish the value of your real estate. However, the yearly gift limit is capped at £3000. If you have any unused allowance, it can only be carried forward for one year.

Conclusion

Paying high taxes can be a huge financial burden. Therefore, it is necessary to have various tax-saving strategies in place. With the help of these methods, you will be able to save a considerable amount of money.

Frequently Asked Questions

What is personal tax planning?

Personal tax planning involves taking advantage of various tax-saving opportunities and strategies to minimize the amount of tax you owe at the end of the year.

Why is it important to consider tax planning at the year end?

Year-end tax planning allows individuals to take advantage of available tax-saving opportunities and make strategic financial decisions to minimize their tax liability for the year.

What are some common tax planning tips for the year end?

Common tax planning tips include maximizing contributions to retirement accounts, taking advantage of tax deductions and credits, and strategically timing income and expenses.

How can I maximize contributions to retirement accounts for tax planning purposes?

You can contribute the maximum allowable amount to retirement accounts such as 401(k) or IRA before the year-end deadline to reduce your taxable income and potentially lower your tax liability.

What are some tax deductions and credits I should consider for year-end tax planning?

Consider deductions for charitable contributions, mortgage interest, medical expenses, and education expenses, as well as tax credits for education, dependent care, and energy-efficient home improvements.

How can I strategically time income and expenses for tax planning purposes?

You can defer income to the following year and accelerate deductible expenses into the current year to reduce your taxable income and potentially lower your tax liability for the year.

Are there any tax planning strategies specifically related to investments?

Yes, tax-loss harvesting, which involves selling investments at a loss to offset capital gains and reduce your tax liability, is a common tax planning strategy related to investments.

What are the potential consequences of not engaging in year-end tax planning?

Failing to engage in year-end tax planning may result in missed opportunities to lower your tax liability, pay unnecessary taxes, and potentially incur penalties for underpayment of taxes.

How can I stay updated on changes to tax laws and regulations for effective tax planning?

It’s important to stay informed about changes to tax laws and regulations by consulting with a tax professional, attending tax planning seminars, and regularly reviewing IRS publications and updates.

When is the ideal time to start year-end tax planning?

Ideally, you should start year-end tax planning early in the year to allow sufficient time to implement tax-saving strategies and make informed financial decisions before the year-end deadline.