As we approach the end of the tax year on 5 April 2022, Thomas Dickson reveals how to save money by significantly reducing your tax bill.
Individual Savings Accounts (ISAs) are a tax-efficient way of investing your money.
If you’re over 18 (16 for a cash ISA), you can contribute up to £20,000 into a stocks and shares or innovative ISA.
Crucially you don’t have to pay capital gains tax on any growth or dividends from your investment.
Let’s take a couple who both pay £20,000 into their ISAs in 2021/22. Assuming a reasonable growth of 6% a year after fees, their combined ISA funds would be worth £95,862 after 15 years.
If the couple had invested without the ISA wrapper, and assuming the dividends are subject to higher rate tax each year, their combined funds would be worth only £87,103.
The gains would also be liable to capital gains tax, reducing the return to only £82,602 – a difference of £13,260 lost to HMRC.
The government offers generous tax relief for people investing in pensions, providing another great opportunity to reduce your tax bill. Because you can now access your pension in full (from the age of 55 – rising to 57 in 2028), these incentives are definitely worth considering.
If you’re in the NHS pension, you should first check your pension input amount, which is sent to you by NHS pensions every year (although you need a way to request this). This is important because you’ll have to pay tax if you exceed your annual allowance.
You can contribute up to £40,000 each year. But this reduces once your annual income is over £240,000 a year.
You should also check your lifetime allowance to ensure you don’t exceed the limit of £1,073,100.
If you’re a director of a limited company, the key deadline is your company year end.
If you make employer pension contributions, these are classed as deductible expenses and will reduce your Corporation Tax liability, which is currently 19% (increasing from April 2023).
For example, a £40,000 contribution from the company will reduce your Corporation Tax liability by £7,600 [40,000 x 19%].
High earners who have not used their annual allowances from the previous three tax years can ‘carry forward’ these allowances. However, if not used before the end of the three years, they’re lost.
So if you wanted to maximise the 2018/19 allowance, you’d need to take action before 5 April 2022.
For self-employed dentists who are higher rate taxpayers, a contribution of £8,000 (from your bank account) before 5 April 2022 will reduce the tax you pay on 31 January 2023 by £2,000.
Your pension provider would also claim an additional £2,000 on your behalf, a total tax saving of £4,000.
Venture Capital Trusts (VCTs)
VCTs offer the opportunity to invest in smaller companies. This is a higher risk strategy and certainly not for the faint hearted.
To encourage investors, the government offers 30% income tax relief on the investment (provided you retain it for five years).
So, if you invest £15,000, you’ll get a rebate of £4,500 – provided you’ve paid at least that much income tax.
VCTs are ideal for dentists who have already used up their ISA and annual and lifetime pension allowances.
Capital Gains Tax
Now is the time to make the most of your Capital Gains Tax (CGT) allowance which is £12,300 a year.
For married couples that’s a tax-free allowance of £24,600.
If you have taxable investments such as shares (excluding ISAs and pensions), and you’ve made a profit, you could consider selling them to realise the gain. You can then offset the gain against the £12,300 allowance and potentially save £2,460 every year [£12,300 allowance x 20% CGT rate].
If you don’t make the most of this relief and your investments grow year on year, you could be faced with a large tax bill when you eventually want to access your savings.
If you’re a principal dentist and are thinking of buying any equipment for your dental business in the next few months, it’s worth understanding the following tax rate changes.
Rishi Sunak introduced a measure in March 2021 which enables limited companies to claim a ‘super’ tax deduction of 130% (increased from 100%) of the cost of new equipment.
For example, if you want to buy a £35,000 scanner, you can claim £45,500 [35,000 x 130%] as an expense, which would reduce your Corporation Tax liability by £8,645 [45,500 x 19%].
This reduces the cost of the scanner to £26,355 [35,000-8,645]. This scheme lasts until March 2023.
However, Corporation Tax rates are increasing from April 2023, so limited companies with profits over £50,000 are subject to a tapering rate of tax, which means they’ll pay 26.5% on profits over £50,000 up to £250,000.
If you defer the purchase of your scanner until after April 2023, you could actually reduce your Corporation Tax liability by £9,275 [35,500 x 26.5%].
So, although the 130% relief is better than the previous 100% allowance. I’m not sure this super-deduction is ‘The biggest two-year business tax cut in modern British history’ as Sunak has claimed.
For a couple worth less than £2m who intend to gift their main residence to their children following both of their deaths, any assets over £1m are likely to be liable to 40% inheritance tax.
However, there’s an annual exemption that allows you to gift £3,000 each tax year (£6,000 if you didn’t use last year’s allowance) to your children or grandchildren.
This will reduce the tax liable on your estate. That’s a saving of £2,400 a year if a couple both use the exemption.
Giving money to charity is a wonderful way to help the causes you care about, at the same time as reducing your tax bill.
If you donate using Gift Aid, the charity can claim 25p worth of tax relief on every pound you donate.
If you’re a higher or additional rate taxpayer you can then claim an extra 20% or 25%.
For example, if a dentist donates £500 to charity, the total value of the donation to the charity is £625. A higher rate taxpayer can then claim additional tax back of £125 [£625 × 20%].
If you want to save tax in the 2021/22 tax year but you’re not sure which charity you want to donate to, you can consider setting up an account such as CAF Charitable Trust, which Martin Lewis, of Money Saving Expert, used when he sold his business.
This ensures you get the tax relief now, but can select a charity in a future tax year.
If you’d like to learn more ways to manage your money effectively, you can contact Thomas at email@example.com. Please be aware of the following investment risks:
- The value of your investment can go down as well as up and you may not get back the full amount invested
- When investing your capital is at risk
- Levels and bases of, and reliefs from taxation, are subject to individual circumstances and may be subject to change
- The Financial Conduct Authority does not regulate taxation and trust advice.