24th February 2017 at 3:46pm
Is your money working hard enough for you?
Effective tax planning can make a real difference to your income and savings.
If you have an adviser to help you, here are a few straightforward things to get your conversation started. If not, here’s what you need to know.
How much tax-free income can you get?
With careful planning around income tax and capital gains tax, you can get up to £33,100 of tax-free ‘income’ each tax year using just five allowances.
Use it or lose it: Capital Gains Allowance, Dividend Allowance, Personal Allowance, Personal Savings Allowance and the Savings Rate Band can give you up to £33,100 of tax-free income.
1 – Personal allowance – your £11,000 tax-free income band
The simplest way to take income from your investments tax free, your £11,000 personal allowance is increasing to £11,500 in April 2017.
While your personal allowance begins to reduce by £1 for every £2 when your total income is £100,000-£122,000, you can get it re-instated by contributing more into your pension.
Our 7 good reasons to pay into your pension blog goes into more detail on this.
2 The £5,000 savings rate band
This recently introduced allowance give you up to £5,000 tax-free income – including interest and offshore bond gains – from your savings on top of your personal allowance.
If your ‘earned income’ exceeds the personal allowance, the £5,000 savings rate band is reduced by the excess and is lost when your earned income is more than £16,000.
With the right planning you can still benefit from the savings rate band because, unlike some other types of savings income, gains from offshore bonds can be timed to coincide with tax years when you have little or no other income.
You can also defer fixed pension incomes to reduce your earned income which could free up your savings rate band.
3 The £1,000 personal savings allowance
The personal savings allowance arrived in April 2016 to give savers the first £1,000 of interest tax free. Higher-rate taxpayers get £500, but there is no allowance here for additional-rate taxpayers.
This is on top of the savings rate band.
4 The £5,000 annual dividend income
A new £5,000 annual dividend allowance also arrived in April 2016 to replace the previous dividend tax credit system. It means no-one pays tax on the first £5,000 of dividend income.
5 Capital gains tax allowance
The capital gains tax ‘annual exempt amount’ is the maximum profit you can make on selling assets without paying capital gains tax. It’s currently £11,100.
What it all adds up to
With these allowances, it’s a case of using them or losing them and it may be worth using them to take savings tax free, even if it means withdrawing more than you need.
You could then reinvest the money back into other tax-efficient investments or do some further tax planning.
If you want to make sure you are making the most of what you’re entitled to, as always we recommend you speak to your financial adviser, particularly when your circumstances or tax laws change.
The information in this blog or any response to comments should not be taken as financial advice. Laws and tax rules may change in the future.
A pension is an investment and you may get less back than you paid into it.
The information here is based on our understanding in February 2017.