Tax planning

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 2023/24, 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:

Some employers allow you to exchange part of your salary for a non-cash benefit, such as increased pension contributions or travel passes. As this effectively reduces the amount you earn, you may drop down into a lower tax band, thus reducing the level of Income Tax you’re exposed to. If you’re a high earner, this may help you to recover some, or all, of the Personal Allowance that you’ve lost.

Investments that support fledgling companies often provide generous tax benefits, which may include Income Tax rebates up to certain amounts. This means investing in them may help to reduce your net exposure to Income Tax. If this is something you’re considering, care should be taken as they are considered high risk. We’d be happy to assess whether such an investment might be right for you, and the potential risks involved with doing so.

When you pay into a pension, the government normally provides tax relief on the money you contribute. As a result, every £100 placed into your pension typically costs you £80 if you’re a basic-rate taxpayer, or £60 if you’re a higher rate taxpayer. If you are an additional rate taxpayer, you may only pay £55.

Please remember that these figures are subject to certain allowances and stipulations. If you’re interested in learning how you could make your earnings more tax-efficient using pension contributions, we would be happy to help.

Dividend Tax

In April 2023, changes to the way Dividend Tax is charged means that you have a greater exposure to the tax if you have investments or are a business owner. In 2023/24, you’re allowed to earn £1,000 from investments before the tax is charged. In 2024/25, it will halve again.

If you’re a basic-rate taxpayer, in 2023/24 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 2023/24, you are allowed to earn up to £6,000 in profit on certain assets before Capital Gains Tax (CGT) is charged. In 2024/25 it drops to £3,000, meaning you may be more liable to CGT. In 2023/24, CGT is typically charged at between 10 % 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 2022 the government “froze” the amount you’re allowed to have in your estate on death before Inheritance Tax (IHT) is charged. The amount, which is known as your “nil-rate band” (NRB), will remain at between £325,000 and £1 million depending on your circumstances.

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 result in less of your wealth being left to your loved ones.

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.

Tax planning

Income tax

Salary Sacrifice

Tax-efficient investments

Stocks and Shares ISAs

Pension contributions