I read recently that the House of Commons Library have estimated that 1.2 million more people will become higher-rate taxpayers in the next four years.

This is mainly due to the chancellor’s decision in March 2021 to freeze the Personal Allowance and higher-rate tax threshold for four years from April 2022, rather than increasing them in line with inflation, although Scottish Tax Bands may be varied by the Scottish Government.

Other allowances have been frozen in the same way, including your Capital Gains Tax (CGT) allowance of £12,300.

A series of factors will affect your household budget

These changes, combined with other factors, mean that the 2022/23 tax year will be financially challenging for many people.

These factors include:

• The annual inflation rate has reached 6.2% and is projected to go higher, ONS data shows
• The price of petrol at the pumps is rising at a dizzying speed
• Household energy bills are set to rise by an average of 54% this year
• National Insurance contributions are going up by 1.25 percentage points for both employers and employees on 6 April 2022.

Because of these challenges, I thought that the start of the new tax year on 6 April would be an ideal time to review your finances, with a view to saving money by reducing the amount of tax you pay.

Read six ideas for giving your finances a spring clean.

1. Review your tax code

A good place to kick off your review is to check you aren’t paying too much tax already.

The amount of Income Tax you pay is dictated by your tax code. So, it makes sense to check it’s correct.

You can do this online through the government website. You can also check that HMRC used the correct information when they worked out your tax code, and get an estimate of the tax you’ll pay in the 2022/23 tax year.

By doing this early in the new tax year, you can correct any errors immediately rather than having to claim a possible overpayment of tax further down the road.

2. Complete your self-assessment tax return

As well as checking your current tax code, it’s also worth completing your self-assessment tax return as early in the new tax year as you can.

For one thing, it gives you peace of mind by knowing it’s done. More importantly, if you’re owed money by HMRC and entitled to a tax refund, you’re much better off claiming it now so you can get it working hard for you.

For example, if you’re using it to clear debt, you’ll save yourself a lot of interest. If you’re investing it, you’ll get extra time for the value to grow.

3. Increase your pension contributions

Pensions are one of the most tax-efficient ways to save money, so it makes sense to maximise your contributions as far as possible.

In the 2022/23 tax year, you’re allowed to contribute up to £40,000 gross or 100% of your earnings, whichever is lower, and benefit from tax relief.

All your contributions will automatically be subject to basic-rate tax relief of 20% – regardless of whether you live in Scotland or elsewhere in the UK. This is added automatically and is a hefty increase on the value of your contributions. 

Furthermore, tax relief on pension contributions can provide you with even greater rewards.

4. Claim higher- and additional-rate tax relief

We’ve already referred to getting your self- assessment tax return done. As part of that return, you can claim higher and additional rates of tax relief on pension contributions, subject to your earnings.

It’s another good reason for completing your tax return as soon as you can. The sooner you claim higher rates of relief, the sooner you can receive it.

Not only that, but you can also claim up to four years of previously unclaimed tax relief. So, you can currently claim relief going back to the 2018/19 tax year.

This could add up to a substantial sum and give your finances a real boost at the start of the new tax year.

5. Maximise your annual ISA allowance

Standard savings and investments can be subject to Income Tax and CGT. However, you won’t pay either tax on any income or growth you generate using an ISA.

So, it makes sound financial sense to maximise your ISA allowance of £20,000 in the 2022/23 tax year.

Again, it’s preferable to invest in your ISA at the start of the tax year if you can, rather than missing out on a year’s worth of investment growth by waiting until the end.

6. Structure your income tax-efficiently

If you’ve retired and are using your accrued assets to provide you with an income, or you’re taking extra income from your investments, you should always act strategically to minimise the amount of tax you pay.

For example, as we’ve already established, income from ISA savings is free of Income Tax and CGT. You also have a CGT allowance of £12,300 (2022/23), so you can encash investments and make gains up to this amount tax-free.

Another key point you should remember is that all the allowances you’ve read about here apply to each individual. This means that part of your strategy should be to consider your combined overall household income and maximise your tax efficiency by all adults using the various allowances.

Don’t forget you can transfer most assets between spouses free of CGT. It’s worth considering this if you’re looking to draw an income from your stocks and shares and other assets, or even using your ISA allowances where available from other investments.

Get in touch

If you have any queries about any of the points in this article, please get in touch.

You can email me at graeme@macfp.co.uk or call me on 01349 832849.