Tax year-end is approaching but millions of Britons still lack understanding about how to mitigate tax.
According to Barclays Wealth, Britons lack basic tax knowledge, such as which income bracket they fall into, which makes it difficult to understand how to use investment wrappers tax-effectively.
In a recent survey commissioned by Barclays Wealth among 3,000 UK adults, there was "persistent confusion" around upcoming tax bills.
Millions of people could be paying more tax than they need to, and widespread unawareness of how to minimise the effect of tax.
The survey analysed people with varying incomes: between £50,000-£100,000; between £100,000-£125,140 (where the ‘60 per cent tax trap’ comes in), and £125,140 and over.
Key findings included:
- One in three (30 per cent) of those earning over £50,000 do not know their current tax bracket.
- A quarter (27 per cent) of those with an income over £100,000 do not know the threshold for needing to complete a self-assessment tax return.
- Half (50 per cent) say they will now need a financial adviser to prepare for higher tax bills.
Clare Francis, director of savings and investments at Barclays Wealth, said: “However, while tax may seem complex, there are a number of simple steps you can take to ensure you make use of the allowances available to each of us every year, which can help reduce the tax you pay.
"Things like using your Isa allowance and increasing your pension contributions can all help and over time, make a significant difference to the tax you pay.”
Here, UK financial advisers discuss five ways in which Britons can make the most of their tax allowances before the tax year ends on April 5 and new tax allowance charges come into effect on April 6.
1) Maximise ISA savings and using investments wisely
UK adults can save up to £20,000 in an Isa, or up to £9,000 in a Junior Isa each tax year. Any returns are free from capital gains tax and income tax so it is important taxpayers take full advantage of these allowances on savings.
According to Edward Grant, director of technical connection at St. James’s Place, this is a great way to help Britons "build their financial futures".
He said: "Investments can shelter from dividend tax and capital gains tax by holding them in tax-efficient wrappers, such as a pension or stocks & shares Isas."
Each tax year, £20,000 can be paid into an Isa or, if clients can tie up their savings until age 55 (57 from 2028), they can pay into a lifetime pension.
Grant adds: “The current pensions allowance is £40,000 annually, or 100 per cent of income if one earns less than that.
"If one has already fully funded an Isa or pension, it is worth talking to a financial adviser to look at the different options available, such as a pension for a spouse, child, or grandchild, or explore Isas for families."
While cash Isas are available, the personal savings allowance lets basic-rate taxpayers earn £1,000 in savings interest tax free, and higher-rate taxpayers can earn up to £500 in interest before they need to worry about tax.
Grant added: "This means that depending on circumstances you may be better off preserving Isa allowance for stocks and shares.”
