With rising energy prices putting pressure on households, many are looking at ways to tighten up their budgets to maintain financial stability. Yet have you considered how your tax plan might also aid your efforts? At WMM, our financial planning team in Oxfordshire offers five ideas to help you save on needless tax and free up more disposable income.
#1 Check your tax code
It is estimated that millions of people are on the wrong tax code – often leading HMRC to claim more in tax than is necessary. Some people have managed to claim back £1,000s after being on the wrong code for years. This can happen, for instance, when you change jobs and might be placed on “emergency tax” (which does not grant your Personal Allowance). Check your pay slip to be sure. The most common code for employees is 1257L.
#2 Claim all relevant expenses
For sole traders and those with self-employed income (e.g. a side business), make sure that you keep thorough records of your expenses. Claim everything you are entitled to, since your profits will likely be subject to Income Tax. Did you buy a new computer for your graphic design projects, for instance? What about software subscriptions that you use for work? You may also be entitled to claim travel expenses too.
#3 Raise children with tax-efficient income
New parents know how eye-watering childcare fees are today. The average price of an after school club, for instance, is £62.13 per week (£2,423 a year during term time; i.e. 49 weeks). Moreover, 50 hours of day nursery (for a child under 2) is £263.81 per week.
Many households feel like they have no choice, therefore, but for one parent to stay at home whilst the other works full-time. However, depending on your circumstances, it may improve your overall household income for both parents to work part-time – with each person doing a day, or two, at home with the kids each week.
This is partly because both parents can earn up to £12,570 per year, tax-free, under their Personal Allowance. It is more tax-efficient, for instance, if two parents both earn £40,000 between them than if only one person earns £40,000 (where £27,430 is subject to the 20% Basic Rate, leading to a £5,486 tax bill).
#4 Review your dividend-salary balance
If you not only take a salary but also a significant dividend (e.g. company directors), then you might want to check that you are getting the best tax deal from the arrangement. You can earn up to £2,000 in dividends each year, tax-free. After that, the tax rates on dividends are lower compared to income tax bands (8.75% and 20% for the Basic Rate, respectively, and 33.75% and 40% on the Higher Rate, respectively).
Increasing your dividends and lowering your salary might, therefore, help you save on overall tax and boost your household income. However, bear in mind that dividends are not guaranteed (e.g. if your business has a bad year) and mortgage lenders may not offer you as much if/when you approach them.
#5 Check your council tax
Council tax bills rose 3% on average for most English households earlier in 2022. Many were placed in bands that were too high, leading to claiming back £100s or even £1,000s. However, 100,000s have still not challenged potential banding errors.
You can check the valuations of your neighbours (and properties like yours) using the government’s VOA website here. From there, you can use free house price websites to check what your home is likely worth. Take care, however, as this process does not only lead to your council tax going down. After a “reassessment”, it could go up! So, make sure you do a thorough check and are confident you have a strong case.
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Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
