In the first week of January this year, HMRC pointed out that with less than a month to go, there were still 5.4 million people who needed to file tax returns before the 31 January deadline.
If completing your tax return is still on the to-do list, or even if you’ve done it already, here are five things this year’s tax return can teach us.
This article isn’t personal advice. If you're not sure if a course of action is right for you, ask for financial advice. All investments can rise and fall in value, so you could get back less than you invest. ISA, pension and tax rules can change, and benefits depend on your circumstances.
ISAs can cut tax, and admin
The first, and most obvious, way to reduce how much UK income and capital gains tax you pay, and how long you have to spend on your tax return, is to use your tax allowances.
When you save or invest outside a pension or ISA, you run the risk of having to give details of the income and gains on your tax return.
If you were to save or invest through an ISA, you don’t ever need to put details about your ISA holdings on your tax return ever again.
This year’s ISA allowance is £20,000. And with the new tax year starting on 6 April, you can put in up to £40,000 into ISAs in the space of just a few months, without having to worry about paying tax in the future.
Think about your investments outside of your tax wrappers
Of course, less admin is always the dream, but your tax return should highlight how much tax you’re saving with ISAs and pensions too.
If you have shares outside these tax wrappers and the available allowance, there’s still plenty of time to move them into an ISA or Self-Invested Personal Pension (SIPP) before the end of the tax year – using Share Exchange (otherwise known as bed and ISA or bed and SIPP).
A pension can transform your finances today as well as tomorrow
Of course, you’re paying into a pension to build a nest egg to last you through retirement, but your tax return should highlight just how much you’re saving today too.
Many private pensions, like SIPPs, and some workplace pensions are set up under a ‘relief at source’ arrangement, with contributions taken from your salary after tax. The employer takes 80% of the contribution amount from the employee’s salary and then the pension provider claims basic-rate tax relief of 20% from HMRC.
The same goes if you make contributions directly into your own pension.
This means if you’re entitled to tax relief at a higher rate, you need to reclaim this through self-assessment. This will help bring your overall tax bill down, and in some cases means the taxman will end up owing you money.
Remember, tax rates and bands are different for Scottish taxpayers. You also can't usually access money in a pension until you're 55 (rising to 57 in 2028).
There’s an upside to losses
If you realised capital gains on some assets and losses on others this year, the losses will automatically be offset against the gains to reduce the amount of tax that’s due.
If you have enough losses to cut your gain down to the tax-free allowance, you can carry forward any additional losses to a future tax year, and offset them against gains then.
You don’t have to claim these extra losses straight away – you have up to four years from the end of the tax year when you made a loss – but it’ll save you from extra paperwork if you do it as part of this year’s tax return.
Timing matters
Most of what you do now will only affect your tax bill for the current tax year, but there are a handful of ‘carry back’ opportunities to cut your bill for the year you’re filing a return for.
The timing can make a major difference if your income is set to be lower this year than it was last year – which can happen after retirement for example.
If, for example, you were a higher-rate taxpayer last year and a lower rate taxpayer this year (after retirement), you can make a charity donation now, but claim the tax relief in your current tax return for last year – so you get more tax relief.
Maximise your tax-efficiency with expert advice
Our financial advisers can help you pay less tax with careful financial planning and making the most of any available allowances.
For complex calculations, they might suggest speaking to an accountant to complement their advice.