10 ways to beat the taxman before April

There are now less than two months until the end of the current tax year, so Laura Suter, director of personal finance at AJ Bell, highlights 10 tips and things for people to consider before the 5 April deadline.

1. Use up your allowances

Everyone over the age of 18 gets an annual ISA allowance of £20,000 – split between the different types of ISA. If you have this much money to set aside, make sure you’re using up your ISA allowance to protect your savings from unwanted tax. An ISA protects your investments from capital gains, dividend and income tax, so it’s the best place for your investments.

On top of this, if you are eligible for a Lifetime ISA you could use up to £4,000 of your ISA allowance to pay into your Lifetime ISA. Those aged 18 to 39 can open a Lifetime ISA, and you’ll get a 25% government bonus on any money you pay in, up to £1,000 a year. ISA allowances are ‘use it or lose it’, so if you miss the deadline to top-up your account you won’t get that allowance back.

On top of that most people can now put up to £60,000 in their pension each year, or 100% of earnings if that is lower. Work out if you want to top-up your contributions and do it before the end of the tax year. This limit isn’t as immediate, as you can carry forward any un-used allowances for up to three years, but it’s still worth considering. Just be aware, anyone with a very high income or who has already started to take taxable income from their pension will have a restricted annual pension limit of £10,000.

2. Protect your cash from tax

Almost 2.75 million people in the UK are set to pay tax on their cash savings interest in 2023-24, with around 1 in 20 basic-rate payers paying tax on their cash interest, rising to 1 in 6 higher rate payers and around half of additional rate payers, based on AJ Bell estimates.

That’s because the Personal Savings Allowance (PSA) has been frozen at its current level since 2016. The PSA currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers get no exemption. Once savers have breached the PSA they pay income tax on any savings interest over this limit.

The easy way to protect your cash from the taxman is to use a cash ISA, assuming you have allowance remaining. Many people chose not to use ISAs for cash savings in recent years, with low interest rates meaning interest earned fell within their Personal Savings Allowance. In many cases non-ISA accounts also offered better rates, but for some people the benefit of fractionally higher rates outside an ISA will now be wiped-out by tax.

An alternative is to share your savings between your partner, if they pay income tax at a lower rate or have ISA allowance remaining (see point 7).

3. Beat the CGT cut

For the second year in a row the amount you can generate in capital gains tax free is being cut. While currently you can make £6,000 worth of gains a year before you pay tax on them, from April that is being cut to just £3,000 a year. It means it’s doubly important to consider whether it’s worth cashing in some gains this year, up to the annual limit, so you don’t have to pay tax on them in future years.

Any gains on investments held outside an ISA or pension above the tax-free limit will be subject to capital gains tax. Gains are added to income and if they fall in the basic-rate tax band are taxed at 10%, while if they fall in the higher-rate tax band are taxed at 20% (an additional 8% is added to the tax rate if the gains are from a second property).

You can use something called ‘Bed and ISA’ to realise gains and then funnel investments into an ISA and protect them from tax. You need to check you’ve got some of your £20,000 ISA allowance left and then use your investment platform’s Bed and ISA service, which means the investment outside of the ISA is sold, the proceeds moved into an ISA and used immediately to purchase the same investment within the ISA.

4. Maximise your free money

Whether it’s claiming tax breaks, claiming benefits you’re entitled to, getting tax relief you’re due or getting a government bonus on your Lifetime ISA – there are lots of ways to get free money from the government that you might be missing out on.

Pensions are a big one – they benefit from tax relief at 20% for basic-rate taxpayers, but higher and additional rate payers can reclaim an additional 20% or 25% tax relief respectively through their tax return. That means for a higher-rate taxpayer every £1 in your pension only costs you 60p.

Anyone using a Lifetime ISA can also get up to £1,000 of free money from the government each tax year, if you put in the maximum £4,000 contribution. So, if you have some spare cash you were planning to put into your Lifetime ISA, do it before the tax year end and claim that free cash. Just be aware that you can withdraw Lifetime ISA money once you’ve reached age 60, or earlier to buy your first property, but if you take the money out for any other reason (apart from severe ill health) you’ll pay an exit penalty of 25%.

You should also check that you’re claiming any government tax breaks that you’re eligible for, such as the marriage allowance, child benefit or tax-free childcare, which gives a 20% top-up to money you use for childcare.

5. Prepare your portfolio for the dividend tax raid

This is the second year in a row that the amount you can earn before paying dividend tax is cut – from the current £1,000 to just £500 from 6 April. As a result of the cut an extra 1,115,000 people will have to pay dividend tax from April 2024, according to figures released by HMRC under a Freedom of Information request made by AJ Bell.

The tax crackdown means the government is expected to take £17.6 billion in dividend tax from investors and company directors in the current tax year – almost £2 billion more than the previous year.

It means that even smaller investors need to think about protecting their investments from the taxman. Dividend tax applies to income-generating investments outside an ISA or pension. You can use the Bed and ISA process to move assets into an ISA, but if you have too many investments to move them all in one tax year you should prioritise the ones paying the highest amount of dividends.

6. Dodge a tax trap

Frozen tax thresholds mean more people are being pushed into the next tax bracket or being pushed into a tax trap – where their earnings rise and mean they aren’t eligible for certain tax breaks or benefits.

Anyone who has seen their pay increase in the past year needs to figure out whether they have hit a new threshold that might mean they are paying more tax. One clear example is where parents have gone over the £50,000 child benefit high income charge, meaning they aren’t eligible for the full child benefit. Or where they have breached the £100,000 limit to be able to claim tax-free childcare and free childcare hours.

But there are also simpler examples, like when you move into the higher-rate tax bracket and see your Personal Savings Allowance cut in half, or your dividend tax rate increase. Often a small contribution into your pension or splitting assets with a spouse can save you a lot of money*.

*Check out the full list and ways to overcome the tax trap

7. Work with your partner

Lots of couples want to keep their money separate – and there may be sensible reasons for that – but it’s worth considering whether it’s worth sharing assets to save on tax. Sharing out assets smartly between spouses or civil partners can be a good way to reduce your tax bill as a couple.

If one half of the couple is a lower earner, or non-earner, there are tax advantages to moving certain investments or savings into their name, to make use of their lower tax rate. At the same time, if one half of the couple hasn’t used up their tax-free allowances in a year and the other has, it might be worth shifting assets to benefit from their Personal Savings Allowance, CGT allowance or dividend tax-free sum.

Equally if you’ve maxed out your ISA or pension allowances and your spouse hasn’t, you should consider whether you want to move money into their name to use those allowances. While sharing assets might be desirable from a tax point of view, there may be other considerations to take into account, such as other family finances, the convenience of joint accounts, wills and potential IHT liabilities.

8. Put money away for the kids (or grandkids)

Lots of parents intend to set up savings accounts for their children and then never get around to it. But if you want to put money into an ISA for them you should use up some of their ISA allowance for this year before you lose it. You can now put up to £9,000 a year into an ISA for each child. They won’t be able to access the money until they are 18, at which point it automatically turns into a normal ISA and transfers into their name, giving them full access.

Another option is opening a Junior SIPP for your child (or grandchild). You can pay in up to £2,880 each year, with government tax relief automatically boosting that to £3,600. Your child won’t be able to access the money until they are at least age 57, maybe later if the government increases the age limit, so it’s very much a long-term play.

9. Use your gifting allowances

While inheritance tax (IHT) is the most hated tax, it’s actually very easy to reduce the IHT bill your estate will pay when you die. There are gifting allowances that everyone can use each year to move money out of their estate for IHT purposes. Everyone can give away up to £3,000 a year without it being considered for IHT, but you can also carry this forward if you didn’t use the allowance last year. This limit is per individual, so a couple can double it.

On top of that there are extra allowances if certain people get married: £5,000 for a child getting married, £2,500 for a grandchild or great-grandchild and £1,000 for anyone else. You can also gift up to £250 per person each year free of IHT. These gifts can be cash, investments, jewellery, property or other assets.

The most generous gifting allowance is ‘gifts from regular income’, which allows you to make an unlimited amount of regular payments to another person but it must come from your regular income, not from assets or investments, and it must be affordable from your regular income.

If you’re doing estate planning it’s definitely worth locking in some of these gifts before the allowances are reset in the new tax year.

10. Automate your investing

People often wait till the start or end of the tax year to use their ISA allowance, especially if they’re using a bonus from work to pay into their account, or conducting a ‘Bed and ISA’ transaction as a tax planning exercise. But you can fund your ISA all year round and automatic regular investing takes away the hassle of remembering to pay in before 6 April. It can also help protect against the danger of investing at a point in time when markets could be a little frothy, instead spreading your investments across the course of the year to smooth things out.

Many investment platforms will allow you to start regularly investing from as little as £25 a month. You can always pause it one month if you need to skip a month, but it means you don’t have to actively log in and invest money every month.

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