As the 31 January 2024 deadline for filing and paying your Self-Assessment tax return fast approaches, it is crucial to be aware of various claims and deductions that can potentially reduce your tax liabilities.
Below are some tax reduction strategies, to help you to navigate the Self-Assessment process more effectively.
Understand your allowances and reliefs
The first step to completing a successful tax return and reducing your liabilities is to understand the allowances and reliefs you are entitled to.
- Personal allowance: The most fundamental relief is your Personal Allowance – the amount of income you do not have to pay tax on. For the 2023/24 tax year, this is £12,570 but it is important to check for any changes or if your income exceeds the threshold, causing a reduction in this allowance.
- Savings allowance: If your income from savings is below £1,000 (if you are a basic rate taxpayer), or £500 (if you are an additional rate taxpayer) you are entitled to the Savings Allowance. For those in the additional rate band, you are not entitled to a savings allowance.
- Dividend allowance: For those with dividend income, the Dividend Allowance allows for £1,000 of dividend payments tax-free. However, this will be changing to £500 from April 2024, so it is important to plan your investment strategy wisely.
Claiming deductions
There are several deductions that individuals can claim on their Self-Assessment tax returns:
- Work-related expenses: If you’re employed, you can claim tax relief on certain job expenses that haven’t been reimbursed by your employer, such as professional subscriptions, tools or uniforms.
- Home office expenses: With more people working from home, claiming home office expenses is increasingly relevant. This includes a proportion of heating, electricity, Council Tax, mortgage interest or rent, and internet and telephone use.
- Charitable donations: Donations to charity under Gift Aid can reduce your tax bill. Higher rate taxpayers can claim the difference between the rate they pay and the basic rate on their donation.
Pension contributions
Contributions to your employees and your own pension can significantly reduce your tax liability.
For higher earners, this is an effective way of reducing their taxable income while saving for retirement.
The current pension allowance per year is £60,000 and the lifetime allowance is just over £1 million.
Capital Gains Tax allowances
If you’ve sold assets like property or shares, you may be liable for Capital Gains Tax.
The tax rates depend on your Income Tax bracket. as well as the type of asset you have sold.
For basic rate taxpayers, the rate is 10 per cent for non-property assets (18 per cent for residential property gains).
For higher and additional rate taxpayers the Capital Gains Tax rate is 20 per cent (28 per cent for residential property).
Each taxpayer has an allowance, known as the Annual Exemption. For the 2023/24 tax year, the Capital Gains Tax allowance has been significantly reduced, halving from the previous year’s threshold of £12,300 to £6,000.
As a result, individuals who realise gains exceeding £6,000 on assets within a year will now need to pay Capital Gains Tax on the amount above this threshold, according to their marginal tax rate.
Be aware that this threshold will fall again from April 2024 to just £3,000, so it is important to consider any sales, disposals or transfers of any assets subject to CGT.
Investment schemes
Investing in certain schemes can offer tax relief:
- Enterprise Investment Scheme (EIS): Offers income tax relief on investments made in qualifying companies.
- Seed Enterprise Investment Scheme (SEIS): Similar to EIS but for smaller, early-stage companies, offering even greater tax relief.
- Venture Capital Trusts (VCTs): Investments in these can offer income tax relief, albeit with certain risks.
Rent-a-Room relief
If you rent out a furnished room in your house to a lodger, the Rent-a-Room scheme allows you to earn a certain amount tax-free on this rent.
The annual Rent-a-Room limit is £7,500., but this is reduced to £3,750 if someone else receives income from letting accommodation in the same property, such as a joint owner.
The scheme is available to both homeowners and tenants, provided the property is your main residence and you have the permission to rent out the room (tenants should check their lease agreements).
It is important to note that the scheme only applies to residential properties and not to rooms let as an office or for other business purposes.
Reporting and paying your tax
It is vital to accurately report all your income and claim only the reliefs and allowances you are entitled to.
Remember, the deadline for online tax returns and paying any tax owed is 31 January 2024.
Late filing or payment can result in penalties, so it’s wise to start preparing well in advance.
In addition, tax affairs can be complex, and seeking advice from a tax professional is often a prudent step, especially if your situation is complicated.
Understanding and utilising these allowances and reliefs can make a significant difference in your tax bill.
As you prepare your Self-Assessment tax return, remember these tips to not only comply with the legal requirements but also to manage your tax liabilities effectively.
Stay informed and consider seeking professional guidance to navigate the intricacies of tax laws and regulations.
If you want to discuss your upcoming tax return with an accountant, please get in touch.