As the average UK citizen worked for the Government for the first 154 days of 2016, paying over every penny earned from every source, here are several ways to cut your tax bill and bring forward your Tax Freedom Day
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What Is Tax Freedom Day?
Tax Freedom Day is a measure of when Britons stop paying tax and start putting their earnings into their own pocket. In 2016, every penny the average person earned for working up to and including 2 June went to the taxman – from 3 June onwards they are paying themselves.
Adam Smith Institute
Discover more about Tax Freedom Day.
Your Tax Freedom Day May Be Even Later
As SIPPclub Members are affluent people, you may have to pass all of your earnings to the Government for much longer than 154 days, particularly if you pay higher or additional rates of tax.
With this in mind, here are a number of things to consider to help you minimise the tax you pay, and bring forward your own personal Tax Freedom Day.
Contribute To Your SIPP
SIPPs continue to enjoy unrivalled tax benefits, but how long this will last is anyone's guess. It was widely predicted some of the generous tax benefits would be cut in the March 2016 budget, but in the event, Gorgeous George postponed any changes.
To maximise the current clutch of tax incentives available on SIPPs, it could well pay you to make the most of your SIPP contributions “while stocks last”, to bring forward your Tax Freedom Day.
Maximise The New Allowances
Introduced in the 2016/17 tax year is the Dividend Allowance and the Personal Savings Allowance. Restructuring your money in the light of these new allowances could help you earn more money tax free, partly because interest rates are set to remain low for some time, and because the rates of Capital Gains Tax have been cut dramatically.
It’s worth spending a little time getting to know these two allowances, so you can make changes that result in your Tax Freedom Day arriving earlier next year.
Make The Most Of ISAs
In the 2016/17 tax year, your ISA allowance remains at £15,240, but next year, it’ll rise to £20,000. It’s worth sheltering as much as you can in ISAs, for if (and more likely when) interest rates and your resultant tax bill rises in the future, your Tax Freedom Day won’t be pushed back.
ISAs are exempt from Income Tax and Capital Gains Tax on the investment returns, and no tax is payable on money withdrawn from the account. Cash and a broad range of investments can be held within the arrangement, and there is no restriction on when or how much money can be withdrawn.
It used to be a simple choice between cash or stocks and shares, but now there are seven types of ISA, each with a different focus. It pays to understand how they each work so you can invest your money best suited to your requirements, whilst bringing forward your Tax Freedom Day.
Invest In Specialist Investment Schemes
There are a number of specialist investment schemes backed by statutory tax allowances, designed to incentivise investors to support smaller enterprises with some generous tax breaks. They are risky but if you’re willing to allocate a modest amount of your overall wealth to niche investments, these could be for you.
Venture Capital Trusts give you an up-front tax relief of 30 per cent providing you hold the investment for at least five years, and all dividends and gains are tax free. Enterprise Investment Schemes invest directly into smaller companies rather than through a fund, and also provide a 30 per cent Income Tax credit. You only have to hold these shares for three years. Seed Enterprise Investment Schemes are earlier stage investments but to offset the likely increased investment risk, they attract greater tax benefits.
Although the tax breaks associated with these schemes are significant and could do a great deal to bring forward your Tax Freedom Day, you should never let a tax incentive be the primary reason for making an investment. It’s vital to do sufficient due diligence on the business or the trust into which you’re investing to ensure your money has a good chance of coming back and returning you a profit, otherwise you might well find you’re substantially out of pocket.
Work With Your Partner
If your spouse or partner is in a lower tax bracket than you, consider how you can spread your wealth to reduce your total tax bill. Transferring assets to the person with a lower income could result in a more favourable tax position when your tax bills are combined. However, whilst your Tax Freedom Day could improve for the better, it’s important to understand all of the consequences of transferring your assets, for your legal entitlements may be affected by the changes you make.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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