3 ways to reduce your tax burden

The freezing of income tax levels until 2028 means that millions of tax payers will be dragged upwards into the next band. The 40% tax bracket now starts at salaries of £50,271, and for those lucky enough to earn between £100,000 to £125,120 the reduction of the personal allowance means a punitive tax trap of 60%. In Scotland, the rates are even higher – with the 42% tax bracket starting at £43,663. It’s really important to be aware of the tax band that you are in, and what steps are at your disposal to reduce your personal tax burden. The top 3 options are below:
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1. Maximise your pension contributions. Pension contributions are not subject to income tax, offering a highly effective way to save money this way before the taxman has taken their cut. The maximum you can save is £60,000 per year, and you can use unused allowances from the previous 3 years. The pension can be invested in funds, which means that the amount can grow considerably over time, and you can take out up to 25% of the pension pot tax-free at 55 (rising to 57 from 2028). The primary downfall of a pension contribution is that you cannot access the money before 55: so you are making an investment in your future, and need to make sure that you won’t need that money in the shorter term.
2. Use ISAs. You can contribute up to £20,000 per year in an ISA, and they are highly tax-efficient. But what does this mean? The interest, dividends or capital gains made from ISAs are not subject to income tax, and in the event of death, the surviving spouse or partner can inherit the ISA allowance. There is also no need to declare ISAs on tax returns, making them simple for tax reporting. You can contribute to any of the four types of ISA (cash, stocks & shares, innovative finance and lifetime). With compound interest the benefits are huge: a £20,000 investment per year over 20 years at 5% growth would become an impressive £670,000. For those over 18 and under 40, you can save up to £4000 per year in a lifetime ISA. For every contribution you make, the Government adds 25% (up to a maximum of £1000 per year) making this a great way to save.
3. Salary Sacrifice schemes. These offers, normally arranged through your employer, offer discounts such as childcare vouchers, cycle-to-work schemes, health and dental insurance, income protection and additional pension contributions. Not only are discounts sometimes available, the cost is deducted from your salary before tax, lowering your overall taxable income. For an expense that you would have paid after tax anyway, the savings can be considerable.

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