Five ways to get a head start on your tax planning

Just in case it’s slipped your radar, there’s a pretty big tax deadline today.

If you complete a tax return and need to make a payment on account – where you are required to make an advance payment on your next tax bill – the deadline for the second payment is 31 July.

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Although all you need to do is pay your bill, logging on to your HMRC account provides the perfect opportunity for you to have a mid-year review and get a head start on your tax planning. Beating the end-of-year rush will not only spare you a headache, it will also ensure you’ve got the time to do everything you possibly can to make the most of all your allowances and cut your tax bill.

Here are a few ideas to get you started.

1) Complete your tax return early

You don’t need to file your tax return until 31 January, but if it’s becoming a spectre that hangs over Christmas or makes you dread the new year, there’s a lot to be said for doing it early.

First, the earlier you get your tax return filed, the sooner you know how much tax you will have to pay and the more time you’ll have to arrange payment. If paying the bill is likely to be a problem, you’ll also have time to set up a payment plan with HMRC, that lets you make payments weekly or monthly.

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Another plus is that if HMRC owes you money, you will likely get your refund faster if it gets your tax return through at a quieter time of year.

But perhaps more important is the prompt it can give you spend a bit of time doing some extra tax planning…

2) Top up your pension

If you pay the higher or additional rate of income tax, you may need to declare your pension contributions on your tax return to ensure you get the rate of tax relief you are entitled to.

This will be the case if your pension is a “relief at source” scheme, which only applies the basic rate of tax relief automatically – to get the higher or additional rate you need to claim it back yourself by completing a tax return. Any pension you have set up yourself (such as a SIPP) will work on this basis, along with some workplace schemes – check with your HR department if you aren’t sure how yours is run.

Entering your pension contributions on your tax return can be a great way of encouraging you to pay in a little more – whether you’re self-employed and have a fluctuating income, or you just have some cash to spare.

Not only does increasing your pension contributions shore up your retirement finances, it can also be an excellent tax-planning tool.

This is because your rate of income tax will be calculated based on your “adjusted net income”, which doesn’t include pension contributions. This means that by paying more into your pension, you are able to reduce your taxable income – which can be particularly beneficial if it stops you going into the higher or additional rate tax brackets.

It can also help you avoid the so-called 60% tax trap, which occurs when your income exceeds £100,000 a year. At this point you will start to lose your tax-free personal allowance at a rate of £1 for every £2 of adjusted income you earn over the threshold (up to £125,140, at which point you no longer have a personal allowance). This equates to an overall tax rate of 60% on that income.

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However, it’s possible to reclaim your personal allowance by increasing your pension contribution to bring your income back below the £100,000 threshold.

The pension allowance is currently 100% of your income up to a maximum of £60,000. The exceptions are higher earners (with an adjusted income over £260,000 a year), who have a tapered annual allowance and those who have already made a taxable withdrawal from their pension, who will be limited to £10,000 a year due to the money purchase annual allowance (MPAA).

3) Make a payment into your ISA

If you’ve had to declare any income from savings or investment accounts, or you’ve had to report a capital gain on any investments, it makes sense to consider whether you are making the most of your individual savings account (ISA).

Each year, you can invest up to £20,000 tax-free in ISAs. If you go for the cash version, there will be no income tax to pay on interest, while there will be no dividend or capital gains tax (CGT) to pay on holdings in a stocks and shares ISA.

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Your current allowance will run out on 5 April next year and, if you don’t use it, you’ll lose it. But, even with lots of time to play with, it makes sense to invest it as early in the tax year as possible, to maximise the length of time your money is in the market.

Invest at the start of the tax year and your money will be invested for up to a year longer than last-minute investors who wait until the end. Investing in July might not quite make you an early bird investor, but you could still get an eight-month head start.

4) Think about using your CGT allowance

With the CGT allowance dropping to £3,000 in April and the dividend tax allowance falling to just £500, it’s never been more important to take advantage of your ISA and pension allowances.

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If you’ve got any investments held in a general investment account (GIA), they will be subject to tax, so it makes sense to move them into either an ISA or pension where they will be out of the taxman’s grasp.

5) Make the most of your marriage

Married couples and those in civil partnerships have a tax-planning advantage over their unmarried peers.

If you’ve maxed out your various allowances, you might be able to save some tax by planning together. No tax will be payable when you pass assets to your spouse or civil partner, so by spreading your wealth between you, it’s possible for you to take advantage of both sets of allowances. Between you, for example, you can invest £40,000 into ISAs and enjoy £6,000 of tax-free capital gains.

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However, while this can cut your collective tax bill, it’s not a decision to take lightly. That means it makes sense to start thinking about it now – and seeking professional advice if necessary – rather than rushing into a hasty decision come spring.