As costs rise and personal tax allowances remain frozen, 2022 has been branded the ‘year of the squeeze’.
And although interest rates are gradually climbing up in response to rising inflation, returns on most standard savings accounts are still low.
For higher-rate taxpayers, this means it’s particularly important to look at tax-efficient methods of saving – and with only a couple of months to go before the end of the tax year, now is the time to get your plans in order.
There’s no one-size-fits-all approach to this, and we’d always recommend getting expert advice that’s tailored to your situation. But in the meantime, here are four key areas to start thinking about.
Max out your ISAs
If you haven’t already used up your annual £20,000 ISA allowance for the tax year, this should be one of your first options for tax-free savings or investments.
This allowance doesn’t roll over from one year to the next, so if you’re planning to use it up, you need to do so before 5 April 2022 or you will lose it.
If you want to save on behalf of a child under the age of 18, you can also put up to £9,000 into a junior ISA. These can be opened by a parent or guardian, with the child taking control of the account when they turn 16, and accessing the money at age 18.
Make pension contributions
Pensions are another useful option for higher earners. Not only do you benefit from tax relief on contributions, but if you’re part of a workplace pension scheme under auto-enrolment, your employer will be making contributions towards it, too – with some employers agreeing to match staff contributions.
The pensions annual allowance stands at £40,000 in the current tax year, although this may be tapered if your income is above certain thresholds.
It’s possible to carry forward any unused allowances for the past three tax years, so make sure you consider this if you’ve used up your current annual allowance.
You should also be aware of the pensions lifetime allowance, which stands at £1,073,100 in 2021/22. If your total pension savings exceed this, you might have tax to pay at a colossal rate when you draw benefits.
Consider tax-efficient investments
Finally, there are tax incentives available for people who invest in small and medium-sized companies or social enterprises through venture capital schemes.
These include the enterprise investment scheme, the seed enterprise investment scheme, social investment tax relief and venture capital trusts.
There are different rules and conditions to meet depending on the type of scheme you go with, but generally speaking, the company must have a permanent establishment in the UK, carry out a qualifying trade, and plan to spend your investment on that qualifying trade.
It can’t be listed on a recognised stock exchange at the time of the investment, and it can’t be controlled by another company either.
Investing through one of these schemes means you can support an exciting new startup, while benefiting from tax relief at the same time.
Get an offset mortgage
It might surprise you, but your mortgage can help you when it comes to hunting down a good savings rate. To be specific, an offset mortgage can help you do this.
An offset mortgage delivers a tax-free savings return by setting your savings and current account against your mortgage debt.
As you only pay interest on the balance, the savings you put in effectively earns an equivalent to the mortgage rate.
And, with no tax to pay on that benefit, the offset mortgage gives you a similar tax-free return on your cash to that a cash ISA can give, along with instant access to the money pot if you need it.
The condition to get this tax-free return is that you must give up the opportunity to earn savings interest on the cash you put in.
As mortgage specialists, this is where we can really help you compared to your average accountant.
Time your asset sales
If you’ve invested in property or other assets and plan to sell them for a gain, you’ll need to be aware of the possible implications for capital gains tax (CGT).
CGT applies at 28% on residential property and 20% on other investments for higher or additional-rate taxpayers. You have a tax-free CGT allowance of £12,300 in the 2021/22 tax year.
To make the most of this allowance, it’s a good idea to think about when you’re selling assets and whether you could space them out to use your allowances across different tax years.
If you jointly own an asset with another person, you can also combine your allowances to cover more tax-free gains. This might be an option to consider if you have a partner with unused allowances.
Get in touch to talk about your savings goals.