Act now to make your finances more tax-efficient!

The current tax year ends on 5 April 2020, so you need to act now to take advantage of the various allowances the Government gives us each tax year to ensure we do not pay more tax than we need to.

The Government gives us a number of allowances each year, many of which were created to encourage people to save for their financial futures as tax-efficiently as possible. It therefore makes sense to use them if you can. Here we look at how you may be able to reduce the amount of income tax you pay in the current tax year and beyond.

You do not pay income tax on your first £12,500 of income in this tax year, but you are likely to be taxed on income above this amount, at a starting rate of 20%, a higher rate of 40% on taxable income over £50,000 and an additional rate of 45% on taxable income over £150,000.

TIP : Check that any savings you have are in tax-exempt accounts, such as ISAs. If not and you haven’t used your full ISA allowance for the year, consider moving them in to a suitable account before the 5 April.


What counts towards your income?

Among other things, the following count towards your taxable income:

• money you earn from being employed

• other money you make, for instance, a second job

• some state benefits 

• most pensions, including the state pension

• rental income, unless you use the rent-a-room scheme

• benefits you get from your job

• interest on savings above your savings allowance.

Taxable income over £100,000?

If your taxable income is more than £100,000 you lose £1 of your personal allowance for every £2 you earn above £100,000. So if you earn £125,000 you lose all your personal allowance – which means that you are taxed at an effective rate of 60% on this tranche of income. However, you will be pleased to know that there are ways you may be able to reduce your taxable income.

How to reduce your taxable income

Not only are pensions a good way of saving for retirement, they also provide significant tax planning opportunities, as the contributions you make reduce your taxable income.

Therefore, if you are likely to lose part or all of your personal allowance, you may be able to retain it in full by paying more in to your pension. Likewise, if you earn more than £150,000, paying more in to your pension could keep your taxable income below the additional rate tax band. 

You can pay up to 100% of your relevant earnings in to your pension each tax year, up to an annual limit of £40,000. If you are already drawing your pension this falls to £4,000. Relevant earnings include income you earn by working, but exclude some other income, for instance from pensions, most rental income and dividends.

Finally, you may not realise that you can reclaim higher and additional rate tax on donations you make under Gift Aid.

Optimise your tax now!

To book a financial review with one of our professional financial advisers call 08000 85 85 90 or email or contact your usual Lighthouse Financial Adviser.

Tax advice with no investment element is not regulated by the Financial Conduct Authority.