According to the Office for National Statistics, inflation reached 7% in March 2022 – the highest level since 1992. Because of this, you could be wondering how to get more from your money, especially when you consider the Guardian reports that inflation is expected to reach almost 9% in 2022.
While it may come as a surprise, one way you could do this is to reduce the amount of tax you pay. This is because HM Revenue & Customs provides several tax breaks that could help you significantly reduce your tax liabilities.
Read on to discover 10 clever and legitimate ways to reduce your tax liability – some of which might surprise you.
1. Utilise your Marriage Allowance
If you’re married or in a civil partnership, you may be able to reduce your household’s exposure to Income Tax using the Marriage Allowance. It typically applies when one of you earns less than the Personal Allowance, and the other is a basic-rate taxpayer.
The Personal Allowance is the amount you can earn before being liable to Income Tax, and in 2022/23, it’s £12,570. The Marriage Allowance allows the lower earner to transfer up to £1,260 of their Personal Allowance to the higher earner, reducing the latter’s Income Tax liability by up to £252.
2. Use all your ISA allowance
In 2022/23, you can deposit a total of £20,000 into ISA accounts, meaning you can place the money into Cash ISAs, Stock and Shares ISAs or a mixture of both. By using all of your ISA Allowance, you’re maximising the amount of wealth that’s typically exempt from Income Tax and Capital Gains Tax (CGT).
3. Transfer assets to your spouse
Assets including additional homes, art or shares, are typically liable to Capital Gains Tax if a profit is made when you sell them. Depending on your tax band and the type of asset you’re selling, the tax charge ranges from 10% to 28%.
That said, you typically have an allowance of £12,300 (2022/23), which means that any profit up to this amount is not usually liable to the tax. As such, you may want to consider transferring assets to a spouse or civil partner, so that you have joint ownership, because this could double your tax-free exemption to £24,600.
4. Invest in an energy-saving product
As VAT is a tax, a clever way to reduce your liability is to buy products that receive more generous VAT rates. This includes some energy products, such as controls for central heating, solar panels and specific “green” heating systems.
As these are typically charged at 5% not the usual 20%, they could help reduce energy costs and your tax bill, while at the same time, helping to save the planet.
5. Use Enterprise Initiative Schemes and Venture Capital Trusts
As Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCTs) support fledgling companies, the government offers tax incentives. This includes a 30% reduction on your Income Tax bill up to certain limits, which could help reduce your liability by up to £300,000 if you invest into an EIS.
If you place money into a VCT, you could lower your Income Tax liability by up to £60,000, and enjoy potential growth that’s CGT-free.
Remember that VCTs and the EIS are high-risk investments and you could get back less than you originally invested.
6. Use Rent-a-Room relief
If you rent a room out in your home, you could receive up to £7,500 in rent a year tax-free (2022/23). For the relief to apply, your home must be fully furnished and you must live in the property as well. If you own the property with someone else, you can claim £3,750 each.
7. Reduce CGT on a rental property
When you sell a buy-to-let property you will typically be liable to CGT, which ranges from 18% to 28% depending on your tax rate. If the property was your main home at any point, you may be able to claim Private Residence Relief, which could reduce your liability.
As the rules are complicated, speak to a financial planner to confirm whether it’s something you can claim.
8. Donate to charity
When you make a donation to a charity using Gift Aid, the charity or sports organisation you’ve donated to is allowed to claim basic-rate tax relief on your donation. As such, if you’re a higher- or additional-rate taxpayer you can also claim the difference as additional tax relief.
9. Starting rate for savings
The Personal Savings Allowance may allow you to earn interest from savings before Income Tax is due. In 2022/23, the allowance allows basic-rate taxpayers to earn up to £1,000 in interest, and higher-rate taxpayers up to £500. There is no allowance for additional-rate taxpayers.
In addition to this, there is also the lesser-known starting rate for savings, which is available to anyone earning less than £12,570 a year (2022/23). If eligible, you could earn up to £5,000 in interest from savings before Income Tax is charged.
10. Consider buying wine
While this is a little tongue in cheek, wine is not liable to CGT. This means that any profit you make on a bottle of wine is not liable to the tax. That said, investing in wine to reduce your tax liability is a high-risk strategy, which could leave you with a severe financial hangover.
Get in touch
If you would like to discuss ways to ensure you’re as tax-efficient as possible, or how to inflation-proof your hard-earned money, contact us on hello@ardentuk.com or call 01904 655 330.
As an award-winning financial advice company and a 2022 VouchedFor Top Rated firm, you can rest assured that you’ll receive excellent advice and a first-class service.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.
