Paying unnecessary tax has the potential to significantly reduce your wealth and any investments that you have over the long term. While HM Revenue & Customs (HMRC) provide several tax allowances and thresholds that could help you to reduce your exposure to tax, understanding them can be difficult.
If you get it wrong, you (or your family) could receive an unexpected – and potentially substantial – tax demand. The good news is that we can help you understand how to use your allowances and thresholds to help reduce your liability.
As tax-efficiency is central to good financial planning, we always assess whether your wealth is as tax efficient as possible, and if it’s not, how to make it more efficient. As a result, you may be able to boost the potential growth of your wealth, investments or pension pot, or simply enjoy more of the money you earn.
The following is a broad summary of four of the most common taxes, and how we may be able to reduce your exposure to them:
Income tax
In 2024/25, you’re usually allowed to earn £12,570 before becoming liable to Income Tax. If you earn between £12,570 and £50,270, you’ll be classed as a basic-rate taxpayer and be liable to a 20% tax charge.
If you earn between £50,270 and £150,000 you’ll be classed as a 40% higher-rate taxpayer, and if you earn more than £150,000 you’ll be an additional-rate taxpayer and liable to 45%. Those who earn more than £100,000 could lose some or all of their Personal Allowance, and if you’re one of them, the amount of Income Tax you pay could effectively be significantly higher than 45%.
As financial planners experienced in maximising tax efficiency, we could help you understand how you may be able to reduce your exposure to Income Tax. This could include:
Dividend Tax
Changes to the way Dividend Tax was charged from April 2023 meant that you business owners with investments have a greater exposure to the tax. In 2024/25, you’re allowed to earn £500 from investments before the tax is charged.
If you’re a basic-rate taxpayer, in 2024/25 the tax will be charged at 8.75%, and if you’re a higher-rate taxpayer, you will be liable to 33.75%. As an additional-rate taxpayer you will be liable to 39.35%.
Restructuring your investments could help you to reduce your exposure to the tax. This might include investing in a Stocks and Shares ISA, as these are not liable to Dividend Tax when you withdraw money from them.
Capital Gains Tax
In 2024/25, you’re allowed to earn up to £3,000 in profit on certain assets before Capital Gains Tax (CGT) is charged. CGT is typically charged at between 24 % and 28% depending on the type of asset you have sold, and your marginal rate of tax.
We could help you understand ways that you may be able to reduce your exposure to the tax, which may include carrying forward losses from previous years. Alternatively, you may want to consider increasing your pension contributions or investing in a Stocks and Shares ISA, as pensions and ISAs are not liable to CGT.
Inheritance Tax
In 2024 the Chancellor, Rachel Reeves, extended the “freeze” on the amount you’re allowed to have in your estate on death before Inheritance Tax (IHT) is charged. This amount, otherwise known as the nil-rate band (NRB), has been frozen until April 2030.
In 2024/25 the NRB is £325,000, or it can be combined if you're married or in a civil partnership, meaning it is £650,000. You may also qualify for further reliefs that could increase the amount you’re allowed to have in your estate before IHT is charged to £1 million.
If your assets continue to increase in value while the NRB remains static, your estate may become liable to a greater IHT liability. When you consider the tax is normally charged at 40%, it may significantly reduce the amount of wealth you can leave to loved ones.
In addition to the freeze, the unused element of your pension pot will become liable to IHT after April 2027, which could significantly increase your estate’s exposure to the tax. This means that while pensions have historically been used to reduce a potential IHT liability, after this date they’re unlikely to be effective.
The good news is that the government allows you to make several gifts every tax year, which could help you reduce – or even negate – your estate’s exposure to IHT. Helping clients understand these gifts, and any other option that may be available to them, is central to what we do at AFH Wealth Management.
As you can see, working with a financial adviser could help you reduce your tax burden, which in turn could help you to boost the value of your wealth, and potentially leave more money to friends and family when you die.
Please remember that this is not a comprehensive list of taxes, and there may be others that you are currently paying that we might be able to help you reduce or negate. If you would like to discuss how we might be able to help you, please get in touch.