With tax year end in a couple of months, Britons are warned about common tax mistakes that are often made.
In an environment where the cost of living still high, it’s essential that individuals review what they can do to be smart with their money and make every pound go as far as possible.
From keeping up with changing legislation to understanding allowances and complex rules, there’s a lot to get to grips with.
Shona Lowe, Financial Planning Expert at abrdn, highlights the common mistakes people risk making when it comes to tax and shares her top tips on how to avoid them.
Not making the most of pension perks
Income tax bands for basic and higher rates were frozen at the Autumn Statement until the 2027/28 tax year. This means more people are paying, and are expected to pay, more tax as wages rise.
One way to potentially manage the amount of tax one pays on income is by saving some into a pension. People can do this by increasing their contributions in their employer’s pension scheme which can be made from their gross pay before any tax is charged.
Ms Lowe said: “And, on top of this, for anything you save into your pension, the government will add the money you would have paid in tax on top – effectively giving you a free bonus for saving for your retirement.
“If you’re already paying into a workplace scheme you could increase your regular contributors. Or, you could start or increase your contributions to a personal pension.”
It should be noted that if someone is self-employed, they won’t automatically be enrolled in a workplace pension and may need to make their own pension arrangements.
Contributing to a pension will also save on their self-assessment tax bill as a higher rate (or top rate) taxpayer.
Leaving too much inheritance to the taxman
Giving gifts in one’s lifetime can help reduce the value of an estate and the potential inheritance tax bill.
But Ms Lowe warned: “One thing many people assume is that if they make a gift, that amount given away will always reduce the value of their estate straight away.
“Unfortunately, that’s not always the case, with some gifts taking seven years for the value to fully leave your estate for tax purposes.
It all depends on the amount you gift, and who to. Because there are lots of different types of gifts, each coming with different rules, good record-keeping is really important.”
She also suggests making sure people have an up-to-date will and power of attorney in place and that will tell their pension provider who they’d like any pension savings to pass to when they die.
Not managing capital gains tax
Capital gains tax (CGT) is charged when someone sells, swaps or gives something away that has increased in value while they owned it. It can apply to investments.
Ms Lowe says: “An option to help manage tax here is to hold your investments within a tax-efficient wrapper such as a stocks and shares ISA or pension so that the value can grow without attracting CGT. Or you might be able to spread your gain over a number of tax years. Specialist advice will often be vital here.”
Not making the most of your ISA allowance
Money saved in ISAs is protected from the taxman and people can save up to £20,000 in ISA products in any tax year.
Ms Lowe said: “Whether it be a cash ISA for an emergency fund, a stocks and shares ISA for longer-term goals or a Lifetime ISA which could help you save for your first home, there are various options to choose from.
“Also, if you want to save for your children or grandchildren, they get their own Junior ISA allowance of £9,000.”
Before investing in any ISA, people should always make sure that they have some ‘emergency’ money set aside in an account that can be easily accessed just in case they need it quickly.
