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Menu MenuIn the realm of personal tax, mastering the nuances of income tax tips can significantly impact your financial health. As we continue our Tax Tips Series, this edition is tailored to enlighten you with a comprehensive array of personal tax tips, each designed to optimize your income and minimize your tax liabilities. Let’s delve into these expert insights to empower you on your journey towards financial efficiency.
One of the best personal tax tips involves keeping your money! Seize the benefits of tax relief when contributing to a registered pension scheme. Automatically receive basic rate tax relief, and if you’re a 40% taxpayer, claim an additional 20% relief via your tax return. Consider this: contributing £4,000 (net of 20% tax) to your pension scheme translates to a further tax reduction of £1,000, resulting in a total contribution of £5,000.
Explore the option of contributing up to £2,880 net (£3,600 gross) annually into a pension on behalf of your children or grandchildren. These funds remain protected from tax charges and cannot be accessed until the child/grandchild reaches the age of 55.
A potentially significant income tax tip is to take advantage of greater flexibility for pension contributions. If you experience a large lottery win or possess surplus cash for retirement investments, there’s no longer a restriction on contribution amounts. While contributions up to the annual allowance (£60,000) can attract tax relief, you’re free to invest any amount.
Ensure your Will is current and valid, especially after marriage. A Will becomes void upon marriage, potentially impacting the inheritance rights of your spouse/partner.
If you plan to leave assets to a non-spouse partner, be aware that inheritance tax will be due on the gift. To ensure exemption from inheritance tax, formalize your relationship through marriage or civil partnership before making the gift.
Take advantage of tax-free wedding or civil partnership gifts to extended family members. Gifts up to £1,000 are exempt, with parents able to gift up to £5,000 tax-free.
Craft a tax-efficient Will to pass on value equal to the inheritance tax nil rate band (£325,000) and designate the remaining amount to your spouse/civil partner without incurring tax. If you are not married to your partner, get married to effectively double your nil rate band.
Plan for business continuity in case of illness or death. Explore policies like life assurance and critical illness cover, often referred to as key-man insurance.
Gifts made from your income are inheritance tax-free once a consistent pattern is established, provided they do not negatively affect your standard of living or capital assets.
Capitalize on gift allowances: Up to £3,000 per tax year is exempt from inheritance tax, which can be carried forward if unused, enabling you to gift up to £6,000 in the following tax year.
If considering substantial gifts to loved ones, do so as early as possible. Gifts are excluded from inheritance tax calculations if you survive for 7 years post-gift date.
Make a gift aid declaration when giving to charities, enabling the charity to reclaim basic rate tax relief while you claim higher/additional rate tax relief.
For those with children under 16 or in full-time education, consider making a provisional claim for Child Tax Credit. If your taxable income drops unexpectedly due to losses or deductions, you can adjust your claim.
If you earn between £50,000 and £60,000 as a higher rate taxpayer, Child Benefit amounts will be restricted. Earnings over £60,000 render Child Benefit nil. Not really a personal tax tip, but you could stop receiving child benefit to potentially avoid having to submit a tax return.
Maximize your ISA investment limit, currently set at £20,000. Income and capital growth on savings in an ISA remain tax-free.
Explore junior ISAs for those under 18, offering a tax-efficient savings option for the younger generation.
Minimize income tax by optimizing joint investments with your spouse/civil partner. Consider transferring income-producing investments to the partner with a lower tax rate.
Utilize your annual Capital Gains exemption, currently set at £6,000, to optimize your investments.
Ensure you receive bank or building society interest gross, without any tax deductions, if you’re a non-taxpayer.
Investing in small unquoted trading companies can yield tax reliefs. Under the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), enjoy income tax relief and capital gains tax exemptions on qualifying investments.
Invest up to £200,000 per tax year indirectly in small companies through a VCT, and receive a 30% tax reduction on the invested amount.
Be aware of the tax bands and how it affects the rate of tax you pay. Higher rate tax is applied to income exceeding £50,270. The tax-free personal allowance is gradually withdrawn as your total income exceeds £100,000. Then the additional tax rates apply to income over £125,140. Pension and charity contributions can mitigate the effect of going over these thresholds.
Capitalizing on modern pension policies, you can begin drawing your pension while still working. Blend pension benefits and contributions to optimize financial flexibility until age 75.
Invest up to £50,000 in premium bonds for a chance at tax-free prizes. These prizes offer potential rewards without sacrificing your initial investment. Although this isn’t really an income tax tip, any winnings are tax free!
When purchasing buy-to-let property, consider joint ownership with your spouse/civil partner as tenants-in-common. This can help reduce tax liabilities by dividing rental income proportionally.
When moving homes, contemplate letting your old property instead of selling it. Upon eventual sale, the majority of the gain can be protected from capital gains tax.
If renting out a room in your home, take advantage of the £7,500 tax-free allowance for rental income received annually.
When installing insulation in your let residential properties, check for the special tax allowance available to cover costs. While the allowance is up to £1,500, any excess costs are not tax-deductible.
Consider borrowing funds for property investment, even if not required, to capitalize on tax relief on loan interest.
We’re moving slightly away from personal tax tips to admin tips now. When it comes to filing your tax return, timing is crucial. To have the Taxman calculate your tax bill automatically, submit your tax return by 31st October for paper filings or opt for online submission by 31st January. This digital route employs a computer program to compute your tax obligations efficiently.
For those seeking a more manageable tax payment timeline, consider having the Taxman collect owed taxes through your PAYE code. To make this happen, ensure you submit your tax return online by 30th December or via paper by 31st October. This arrangement grants you extended time to settle your dues, with the Taxman agreeing to collect up to £3,000 of tax through this mechanism.
Life’s circumstances are dynamic, and so are your income levels. If your taxable income decreases, resulting in a lower tax bill, seize the opportunity to adjust your income tax payments on account. These payments are typically due on 31st January during the tax year and 31st July after the tax year concludes.
Whether you’re a sole trader or a business owner, meticulous recordkeeping is paramount. Maintaining comprehensive and accurate business records not only facilitates smooth tax compliance but also reduces the risk of errors, extra tax payments, and penalties that might arise during a tax audit.
Should you find yourself facing inquiries from the Taxman—be it in writing, over the phone, or during an on-site visit—prioritize consultation with your accountant. Seeking professional advice ensures that your responses are accurate and well-informed. If needed, request written queries to allow for thorough research before answering.
It’s crucial to remember that even the Taxman can make mistakes. If you’re accused of underpaying taxes, engage your accountant to review the calculations before agreeing to any payments. This precaution can save you from potential financial setbacks caused by inaccuracies.
Incorporating these personal income tax tips into your financial strategy can lead to greater efficiency, increased savings, and a stronger financial future. Remember, every individual’s financial circumstances are unique, so consult with your dedicated tax advisor to tailor these personal tax tips to your specific needs. Stay tuned for the next instalment of our Tax Tips Series, where we’ll delve into expert insights on VAT savings.
About Us Our Prices Instant QuoteMTD for Income Tax (Making Tax Digital) will become compulsory soon. You will probably be wondering: What is MTD for Income Tax? Does MTD for Income Tax apply to me? When will MTD for Income Tax start? What do I need to do for MTD for Income Tax? This post will address all of your questions about Making Tax Digital for Income Tax.
MTD stands for Making Tax Digital. It already applies to VAT returns. Soon, MTD will apply to Income Tax. Under MTD, HMRC requires businesses to keep digital records of their transactions. Then those businesses need to submit the totals of the transactions to HMRC using software. There must be a digital link between the transactions and the totals submitted to HMRC. Digital link means that you can’t re-enter or copy and paste amounts, the software must be ‘attached’ to the total of your transactions. You can still have paper invoices and receipts, but you will need to enter them into accounting software or a spreadsheet with a formula for the totals i.e. =sum(cell:cell).
For Income Tax, the MTD returns will be quarterly and annually. All businesses will need to prepare reports to the tax year (5th April) and the tax quarters (5th July etc). There will be an option to change these to the month end just before those dates (31st Mar, 31st Jul etc).
MTD for Income Tax will apply to most sole traders and many landlords. However, sole traders and landlords will be exempt if annual sales/rents are less than £50,000 (£30,000 from April 2027). The limit is per person, so if a property is jointly owned, you can halve the rental income when testing for the £50,000/£30,000 limit. When testing the £50,000/£30,000 limit for a particular tax year, you need to go back 2 years. So use your income that was included on the tax return that was due just before the tax year starts. So your income for the 2023/24 tax year will determine whether you are exempt or not for the 2025/26 tax year. That’s because it’s due by 31st January 2025, a few months before the start of 2025/26.
If annual sales are less than the VAT registration threshold (currently £85,000), only two amounts will be required. They are total income and total expenditure. However, you should also keep categorised totals to help check that there are no errors or omissions. Balance sheet amounts are not required.
Unless you are exempt, you will need to comply from 6th April 2026 (was 2024 but it was delayed by 2 years). The first quarter ending 5th July 2026 will need to be submitted by 5th August 2026. The returns and deadlines will be quarterly thereafter. The first End Of Period Statement (EOPS) will be for the year ending 5th April 2027 and will be due by 31st January 2028.
All sole trader businesses and landlords will need to prepare accounts to the tax year 5th April. There will be an option to change this to 31st March. If you currently prepare accounts to a different date, you will need to have a long period to change it to the tax year as soon as possible.
If you need to extend your accounting period to end on the tax year end, it may mean that you have a higher tax bill than expected. However, you will be able to claim overlap relief. when you first started trading you will have had some profits taxed twice due to an overlap of periods. That’s because the first year would have been taxed up to the tax year end, the second year will have been taxed to the full accounting year end. You will be able to claim overlap relief which will reduce your taxable profit. You will need to contact HMRC to ask for the amount of your overlap profits, unless you or your accountant has a note of it.
The easiest way to comply with MTD is to start using accounting software, such as Pandle (free or we can get Pandle Pro for £2.50pcm). Xero, QuickBooks and FreeAgent are other good options. After entering or importing your bank transactions, you just need to categorise each one. You can import using a CSV bank statement or an automatic bank feed. Then at the end of every quarter you will be able to simply click a few buttons to submit your MTD update to HMRC.
If you don’t want to use full accounting software, you could use a spreadsheet together with bridging software that will submit the totals of your spreadsheet to HMRC. You will need to direct the bridging software to the correct totals on your spreadsheet every quarter.
If you have a retail business, you don’t need a digital link back to every individual sale. However, the digital links must start from daily sales totals, not weekly and not monthly.
If you are a landlord and have a trading business, your landlord records will need to be separate from your trading records. If you have more than one trade, you will need to keep separate digital records for each trade.
Quarterly updates can be on either the cash or accruals basis. If you qualify to use the cash basis, you can use the cash basis for The End Of Period Submission (EOPS), or you can use the accruals basis. The EOPS doesn’t have to be on the cash basis if the quarterly updates are cash. You adjust the EOPS with accounting adjustments (such as private use adjustment), so it will be different to the totals of the 4 quarterly updates.
Not unless you are exempt – see above Does it apply to me section. You could transfer everything to a company. However, you may have to pay capital gains tax and companies are also in the pipeline for MTD but not until 2026 at the earliest.
Yes, we already submit MTD VAT returns and we will be offering to submit quarterly and annual MTD for income tax reports. Sole traders will need to be on our Quarterly packages. Landlords will need to be on our Investor+ tax return package. Click below for our prices and an instant quote.
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