The UK has a complicated and continuously changing tax system.
Every individual must pay taxes according to the applicable income tax brackets, so they must plan taxes efficiently to achieve financial goals.
From inheritance tax to capital gains, it’s always better to plan ahead of time when dealing with taxes.
Making tax planning UK a regular activity throughout the year has several advantages.
We have written this blog to help you understand tax planning and its steps.
Table of contents
- Basics of tax planning?
- Benefits of tax planning
- 5 critical tips for the perfect tax planning
- Why is business tax planning essential?
- How can tax experts help with tax planning?
- Final thoughts
Basics of UK tax planning?
Tax planning is analysing one’s financial situation from a tax efficiency point of view to plan finances optimally. Tax planning helps taxpayers take full advantage of all available tax exemptions, deductions, allowances, and benefits to reduce overall tax liability for a tax year.
One of the most significant advantages of tax planning is that the returns can be directed to investments. It is the most effective way to make wise investments while using the resources available due to tax benefits.
Investing tax generates more cash flow in the economy, helping the country’s financial development. Hence, tax planning contributes to the financial stability of the individual and the nation.
Benefits of tax planning
1. Flexibility in tax payment
Tax planning gives individuals and businesses a more flexible approach to paying taxes.
Tax planning gives individuals complete control of their finances and payment timings.
As a result, it prevents the stress of paying more taxes than income. Gaining control of all payment accounts makes achieving sustainability and budgeting the finances easier.
2. To see the bigger picture
Tax planning gives businesses and individuals an insight into the current financial situation.
Individuals can evaluate whether the business structure needs modification and get a clear picture of potential profits.
As a result, a company owner can find new investment opportunities and examine the untapped options to increase profitability.
3. To minimise litigation
Tax evasion and avoidance mostly happen due to high taxes. Tax planning helps fix tax disputes with the government authorities.
It also resolves the differences between the government and the taxpayers, as the government strives to collect maximum taxes.
In contrast, the taxpayers look for practices to pay the minimum tax possible. Thus, tax planning protects citizens and entities from legal penalties.
5 Critical Tips for the perfect tax planning
1. Plan your income strategy for 2022/23
The start of the new tax year is an excellent time to begin strategic planning if you’re earning income from multiple financial arrangements to maximise your savings.
If you are a couple, including your partner or spouse in tax planning helps create an effective strategy for the household to earn a substantial joint, tax-free income.
For example:
- Each person has a CGT allowance of £12,300. If your assets are not in an ISA or pension, you can earn up to this amount as income free of CGT. This amounts to a yearly tax-free income of about £24,600 for you and your spouse or partner. Remember, this allowance is decreasing in the coming tax years.
- Your ISA income is exempt from both income tax and capital gains tax. So essentially, you and your partner or spouse can enjoy the double benefits if both of you are investing.
- You both have a Personal Allowance of £12,570, implying you can have a collective income of over £25,140 free from Income Tax.
2. Inheritance tax and gifting within exemptions
UK Inheritance Tax planning is a complex and subtle tax with several restrictions and exemptions that influence how much of your estate goes to the HMRC.
Inheritance tax trusts can give you more control over what happens to your property after you pass away. There are some common exemptions that you might use for inheritance tax planning:
- A tax-free allowance of £325,000 (effectively renewable every 7 years while the donor is still alive)
- An annual gifting exemption of up to £3,000, which can be carried over and utilised in the next year if unused in a tax year
- You can give as many small gifts as you want in a tax year up to a worth of £250 each.
- You may give your child a wedding gift up to £5,000, your grandchild a gift up to £2,500, and anyone else a gift up to £1,000
3. Maximise your ISA allowance
ISAs are an efficient way to save money, as you don’t have to pay any Income Tax or Capital Gains Tax (CGT) when you withdraw money from your account.
According to data from the London Stock Exchange, FTSE 100 increased by 6.2% between the beginning of the 2021/22 tax year and the start of March 2022.
Therefore, if you had invested your entire £20,000 ISA allowance in a simple FTSE 100 tracker fund on April 6, 2021, it would have been valued at around £21,240 on March 1, 2022, less any charges but excluding dividend payments.
You would have lost out on nearly £1,200 by delaying your investment.
Remember that each person over 18 can make an ISA contribution of £20,000, regardless of income, so you should try to utilise as much of your spouse or partner’s allowance as you can.
4. Minimise capital gain tax
Every person in the United Kingdom has an annual Capital Gains Tax allowance. For tax year 2022/23, the allowance limit is £12,300.
You won’t pay CGT as long as your gains are below the allowance.
You cannot carry this allowance forward, so it makes sense to use some of your allowances every year to decrease the risk of incurring a significant CGT bill in the future.
You can lower your CGT liability by balancing losses and profits within the same tax year.
If you have reported your losses with HMRC, you can carry them forward indefinitely to offset future gains if your losses are more significant than your gains.
Transfers to your civil partner or spouse are currently exempt from Capital Gains Tax as long as the transfers are completed with no strings attached.
You can use combined CGT allowances by transferring assets to a civil partner or spouse.
Another successful CGT strategy is to transfer assets to a spouse with a reduced tax rate.
Deducting expenses associated with your assets may also enable you to pay less in capital gains taxes.
For instance, when determining your CGT liability after selling a rental property, you can deduct both the solicitors’ fees and the stamp duty you paid.
5. Save for your children
The primary objective of investing for a child is often to support them financially in the future.
However, additional benefits could reduce the amount of tax needing to be paid both now and in the future.
Using a tax-efficient account, such as a Junior ISA, or a child’s pension, such as the Junior SIPP, is the most straightforward approach to reducing taxes.
Parents also have no tax liability because the investments are held in the child’s name.
A Junior ISA allows you to save up to £9,000 a year. You can choose between a cash ISA and a stocks-and-shares ISA; the latter provides exposure to the stock market and the chance for longer-term investment growth.
With no income or capital gains tax payable, ISAs provide investment growth in a tax-free environment. From the age of 18, your children can access the money tax-free.
Why is business tax planning essential?
The main advantage of corporate tax planning is that you’ll reduce the amount you owe to HMRC by utilising all available credits. In the long run, it is simple for your company to meet its financial objectives.
The advantages of a suitable tax payment plan are briefly listed below:
- Having greater control over payments
- Reduced tax rates
- Reduced tax bills
- Full benefit of tax credits
- Use of tax relief legislation
- Having control over payment timings
You should regularly assess your plan to ensure you’re utilising all available allowances because tax regulations are constantly changing.
How can tax experts help with tax planning?
Tax experts can assist you in tax planning advice, tax law, and compliance.
Company owners and individuals can employ a tax consultant for short-term and long-term tax optimisation.
They help you make tax returns to minimise your liabilities throughout the year.
A tax consultant can reduce some of your burdens if you owe back taxes or have other issues.
They can work to slow the collection process, reduce the fines you’ve incurred, and design a reasonable payment schedule.
They’ll communicate with the HMRC to develop the best possible solution for you.
A consultant can also help you create the best tax plan for your business or family. They’ll be able to identify the tax benefits for which you qualify.
They can help you get a higher return or lessen your debt.
Final thoughts
Every taxpayer understands the toll that paying taxes puts on their income.
Tax planning is essential and must be done wisely to minimise this impact.
It also assists you in smartly investing in savings instruments, offering combined benefits of investment growth and a decrease in taxes paid to HMRC.
It is essential for individual investors as it can potentially decrease their tax liability and improve their ability to plan for retirement in the future.