How to cope with shockingly high taxes

As if the rocketing cost of living was not causing enough problems, personal taxes are rising as well putting even more pressure on our wallets. 

UK taxes are now at their highest levels in 70 years, as Chancellor Jeremy Hunt battles to shrink the deficit. In November, he froze income tax and inheritance thresholds until 2028, which will drag more into HM Revenue & Customs’ tax net every year as incomes and assets rise. He also took the axe to capital gains tax and dividend tax allowances. 

Nobody wants to pay more tax than necessary, especially today, and the following steps could legitimately cut your exposure. 

There is no income tax or capital gains tax to pay on savings and investments tucked away in an Isa. The money is tax-free for life.

Make the most of your ISA allowance

You can put away up to £20,000 each year in the Isa tax umbrella, as can your partner if you have one. 

Children have a £9,000 Junior Isa allowance on top of that. Use as much as you can to defy Hunt. 

More than 22 million Britons hold Premium Bonds, run by National Savings & Investments, and all winnings are free of tax.

However, Premium Bonds are not suitable for those who need a reliable income, as winning prizes is down to chance. You could bag one of the two £1 million monthly jackpots, or get nothing at all. 

If you have any capital gains consider taking them before April 2023. At that point, today’s £12,300 annual exemption is cut to £6,000, then £3,000 in April 2024. 

Married couples and civil partners can reduce their liability by pooling their annual exemptions through an “interspousal transfer”. 

Consider also moving assets into the name of the partner who pays less income tax, to reduce the CGT rate you pay if you do face a charge. You can also offset any recent losses you have incurred against your gains. 

If you are likely to move into a lower income tax bracket at some point in the near future, say, after retirement, consider delaying taking any taxable gains until then. 

HM Treasury offers a huge financial incentive to invest in a pension, by offering tax relief on your contributions. 

Money in your pension can also grow free of tax, while you can pass on unused pension to loved on free of inheritance tax.  

You could pay more into your pension

If you die before age 75, beneficiaries pay no tax on the money. If you die after that, they will have to pay income tax on withdrawals. 

You can claim tax relief on annual pension contributions equivalent to your annual salary, up to a maximum of £40,000 a year, known as the annual allowance. If you have spare cash, you can mop up any unused tax relief from up to three previous tax years. 

Check whether your employer offers a salary sacrifice arrangement, where you take salary or bonus as a pension contribution instead of income. This saves both income tax and National Insurance contributions. 

Some schemes also let you pay for a company car, bicycle, season ticket loan or childcare out of gross pay, bringing further tax savings. 

Married couples and civil partners get their own tax break. If one partner earns less than the £12,570 personal allowance and the other is a basic-rate taxpayer, the couple can get this tax break worth £252 a year.

If you are married or in a civil partnership, you can get a tax break

Claims can be backdated up to four years, giving a potential £1,242. Cohabitees don’t benefit. Find out more at government portal Gov.uk. 

More than 800,000 families fail to claim tax-free childcare worth up to £2,000 a child towards childminders, nurseries, nannies, after-school clubs and play schemes. Working parents should make the effort to claim, given today’s huge childcare costs. 

Inheritance tax thresholds have now been frozen until 2028, but you can reduce your exposure by making gifts to loved ones. 

Every year you can gift up to £3,000 away tax free, plus last year’s allowance if you didn’t use it. The money instantly falls out of your estate for IHT purposes. 

You can also give up to £250 each year to as many people you wish, plus gifts when loved ones get married.  

More complex measures such as trusts may require advice.

Read more: Switch your savings bank as interest rates skyrocket

Read more: 7 Money saving tips to beat the cost-of-living crisis

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