Effective tax planning strategies for individuals

We all want to make sure we’re bringing home as much money as we can to give ourselves and our families the best standard of living we can. Effective tax planning is a crucial part of this, as it will help you reduce your tax liability to optimise your savings. In today’s article, we’ll take a look at the best tax planning strategies for individuals.

Use your allowances and reliefs

Most taxes have an allowance; you’ve probably heard of the personal allowance for income tax. These allowances shield a portion of your income from tax. Anything that exceeds the allowance limit is taxed. But an allowance isn’t always applied automatically. Instead, you often have to claim it on your tax return – although this is a pretty straightforward thing to do. The main allowances you should know about are:

• Personal allowance: This is £12,570 (as of the 2024/25 tax year). You can use it to shield income from employment, self-employment, savings, rental income and more.
• Capital gains: When you sell an asset, you pay capital gains tax. However, there is an allowance of £3,000 as of the 2024/25 tax year. This is exceptionally low, having gone down from £12,300 to £6,000 and then to £3,000 in the last few years.
• Dividends: Dividends paid out to shareholders of limited companies are taxed and face a dividend tax. The allowance is currently £500.
• Marriage allowance: If you or your spouse/civil partner earns less than the personal allowance for income tax, you can transfer up to £1,260 of your personal allowance to the higher earner, reducing their tax bill by up to £252.

Top up your pension contributions

Putting away money in your pension pot is always a good idea, especially given the fact that your contributions may benefit from tax relief.

Pension tax relief is applied at the contributor’s highest marginal tax rate, with the government contributing 20% of the total contribution directly. Higher rate taxpayers can claim additional tax relief through self-assessment. Here’s how it works:

• Basic rate taxpayers: If you contribute £800, the government will add £200, making a total contribution of £1,000 (because 20% of £1,000 is £200).
• Higher rate taxpayers: If you contribute £800, the government will still add £200, making the total £1,000. You can claim an additional £200 (20% of £1,000) through self-assessment.
• Additional rate taxpayers: If you contribute £800, the government will add £200, making the total £1,000. You can claim an additional £250 (25% of £1,000) through self-assessment.

Bear in mind that there is a £60,000 annual allowance for pension contributions. That doesn’t mean you’re not allowed to put £70,000 away in a year, only that the £10,000 that exceeds the allowance will not qualify for tax relief.

Tax-efficient investments

Investing responsibly can be an effective way to increase your income. Investing with a tax strategy in mind is an even more effective way to increase your income. Therefore, when considering your investment options, you should consider the following schemes:

• Individual savings accounts (ISAs): ISAs allow you to invest up to £20,000. You do not have to pay income tax or capital gains tax on your returns.
• Enterprise investment scheme (EIS): Investments in qualifying companies up to an annual maximum of £1 million get income tax relief at 30%. If the investment is held for more than three years then any capital gain generated is exempt.
• Seed enterprise investment scheme (SEIS): An individual can invest up to £100,000 per tax year in start-up companies that qualify, receiving income tax relief at 50%. If the investment is held for more than three years then any capital gain generated is exempt.
• Venture capital trusts (VSTs): Investments up to an annual maximum of £200,000 qualify for income tax relief at 30%. Dividends received are tax-free and there is no capital gains tax payable on any gain made when sold.

There’s more to each one of these schemes, especially the EIS, SEIS and VSTs, so if you’re interested in any of them, make sure to contact Stapletons and we will be able to go over them in greater detail for you.

Need help with your tax strategy?

Navigating the complex world of tax planning strategies can be challenging, but it’s crucial for optimising your financial health. While this guide provides an excellent starting point, there’s much more to effective tax planning. Consulting with a tax advisor can ensure you’re making the most of all available allowances, reliefs, and investment opportunities

Don’t leave your financial future to chance — reach out to a tax adviser today and take control of your financial well-being.