Top 10 tax tips for year end planning

Laura Suter, Head of personal finance, AJ Bell. Croner-i

Laura Suter, director of personal finance at AJ Bell, highlights 10 tax mistakes to avoid before the end of the tax year on 5 April.

With the end of the tax year fast approaching, millions of people are at risk of paying more tax than they need to simply by overlooking key allowances and reliefs. From savings interest and ISAs to pensions, investments and family finances, small decisions made – or missed – before April can have a lasting impact on tax bills.

We’ve picked out some of the most common end-of-year tax mistakes and the simple steps savers can still take to protect their money.

1. Assuming your savings interest is still tax-free

Lots of savers assume their savings are tax-free, not realising that tax could be eating away at their hard-earned interest. The government estimates 2.6m people are expected to be hit with tax on their savings in the current tax year.

For years savers shunned cash ISAs, as interest rates were low and their interest was covered by the tax-free personal savings allowance, which means basic rate taxpayers can earn £1,000 of savings interest a year before they pay tax, while higher rate taxpayers have a £500 limit and additional rate taxpayers no limit.

Now interest rates have risen and people are earning more on their savings, millions more people are hitting these limits and paying tax on their savings. At the same time, fiscal drag means more people have been pushed into the next income tax band.

On top of this, in April next year the amount of tax paid on savings interest will increase, so savers will be hit with even bigger tax bills.

A saver earning the top easy-access savings rate of 4.5% would need to have £22,200 in savings before they hit the tax-free limit if they are a basic rate taxpayer, and for higher rate taxpayers they only need to have £11,100 in the savings account before they start to pay tax on their interest.

Savers in a fixed-rate account could have even less, as often all the interest is paid out in a single tax year.

Luckily there’s an easy fix: savers can move their money into a cash ISA and protect any interest from tax, or potentially benefit even further by moving that money into a stocks and shares ISA and investing it tax-free for the long term.

2. Letting your ISA allowance go unused

ISA allowances are strictly ‘use it or lose it’. Failing to use the £20,000 allowance before 6 April means permanently losing tax-free protection on savings and investments, which could potentially cost thousands in future tax on interest, dividends and gains.

Each individual gets the £20,000 ISA allowance, while children get a £9,000 annual limit, meaning the potential tax shelter for a family is huge.

Remember to keep track of all the money saved across different ISAs, as this annual limit is across all account types.

3. Ignoring pension top-ups that could slash your tax bill

Not topping up your pension before the tax year end means missing out on immediate tax relief, which can be particularly costly for higher rate taxpayers, where every £1 in a pension can cost as little as 60p.

When contributing to pensions, basic rate taxpayers receive 20% tax relief, while higher and additional rate taxpayers can reclaim an extra 20% or 25% respectively either online or when filing a tax return. 

For some, a small contribution could also prevent them falling into a tax trap. If you’re close to an earnings threshold that means you’ll lose some tax breaks or government support, such as for childcare, you can contribute to your pension to reduce your effective income, and once again be eligible for the tax break.

4. Forgetting to bank capital gains

The capital gains tax (CGT) burden has continually increased over the years, with the tax-free allowance for each person now down to £3,000. Basic rate taxpayers will pay 18% tax on their gains, while higher and additional payers will pay 24%.

Investors sitting on profits outside an ISA could be sleepwalking into a bigger CGT bill. If you have gains outside an ISA, you could realise the gains up to the annual £3,000 limit and move that money into your ISA (assuming you have allowance remaining) – this process is known as a ‘Bed and ISA’. You could also transfer assets to a spouse to use their allowance or use investment losses to offset your gains.

5. Overlooking dividend tax on small portfolios

The dividend allowance has been slashed over the years and the tax rate is now going to increase from April. Announced in the last Budget, the dividend tax rates will rise next tax year to 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers – they will remain at 39.35% for additional rate taxpayers.

The reduction means you only need to earn £500 in dividends before you’ve exhausted the allowance.

If an investment portfolio yielded 5%, an investor would only need to have £10,000 in an account before they hit the limit. You could use a Bed and ISA to move the dividend-paying investments into your ISA and protect them from future tax charges.

6. Falling into a frozen-threshold tax trap

Pay rises can quietly push people over key thresholds – reducing allowances, increasing tax rates or wiping out benefits like child benefit or tax-free childcare.

It is important to check your income position before April, including any bonus, commission or overtime.

Parents should be particularly vigilant – if they hit the £100,000 threshold for tax-free childcare and funded hours, that could represent a huge drop in support.

Other examples are child benefit beginning to taper once income exceeds £60,000 and disappearing entirely at £80,000, while those who start to earn over the personal allowance lose the marriage allowance.

If you move into the higher-rate tax bracket the personal savings allowance will be halved and you’ll pay a higher dividend tax rate.

A small pension contribution could reduce your taxable income below these thresholds.

7. Keeping assets in the higher-earning partner’s name

Couples who don’t share assets often end up paying more tax than necessary. Failing to use a lower-earning partner’s allowances, ISA limits or tax bands can mean paying avoidable tax on savings, dividends and capital gains.

For example, if one partner is a lower earner, the couple could transfer savings or investments into their name to mean they pay a lower rate of dividend, capital gains, income and other taxes. On top of that, if one partner hasn’t used their ISA, pension, personal savings allowance, or CGT exemption, it might be worth moving cash or investments around to take full advantage of those tax breaks.

8. Missing out on free money for children

Not using Junior ISAs or Junior SIPPs means missing out on tax-free growth and, in the case of pensions, automatic tax relief. With a Junior ISA you can save up to £9,000 in the account per child each year, with the money growing tax-free until the child turns 18.

Another option for the very long-term is a Junior SIPP, which allows contributions of up to £2,880 per year, with government tax relief topping that up to £3,600. However, the child will not be able to access the money until at least age 57.

Even putting away £500 a year into a Junior ISA can result in a decent pot after a few years, assuming it’s invested and earning a 5% return a year after charges.

After five years your child could have a pot worth £2,900, and if it was saved for the full 18 years they would have a pot worth almost £15,000.

Someone who is able to put away the full £9,000 Junior ISA allowance each year, earning the same 5% return a year, could have £52,200 after five years or £266,000 after the full 18 years.

9. Forgetting to use inheritance tax gifting

Failing to make use of annual gifting allowances means more of your estate could be dragged into inheritance tax (IHT) later. Small, regular gifts made now can significantly reduce future IHT bills – but once the tax year ends, unused allowances are largely lost.

Now pensions will be pulled into the IHT net from April 2027, more people will be taxed on their estates. The golden rule is not to gift more than you can afford, as you don’t want to leave yourself short in retirement. But there are gifting limits that are often under-used. 

Every individual can gift up to £3,000 per year free of IHT, and this allowance can be carried forward if it was not used in the previous year. Couples can combine their allowances to give away up to £6,000 tax-free annually.

On top of that, extra allowances apply for wedding gifts, with parents able to gift £5,000 to a child, grandparents able to give £2,500 to a grandchild, and anyone else allowed to give £1,000 tax-free. Small gifts of up to £250 per person each year are also exempt.

The most generous exemption is for gifts made from regular income, which can be unlimited if they do not reduce the donor’s standard of living. If you haven’t used up your annual gifting amounts, it’s a good idea to consider it before the end of the tax year.

10. Treating tax planning as a once-a-year scramble

Leaving everything until late March increases the risk of mistakes, missed allowances and rushed decisions. Savers who don’t automate investing and contributions often under-use their tax shelters year after year, exacerbating the long-term cost and making the end of the tax year more stressful than it needs to be.

About the author

Laura Suter is director of personal finance at AJ Bell