Tax tips that can save women serious cash
Women’s money has been hit hardest by the pandemic. But the good news is that there are tax breaks available that can mean you keep some extra cash in your pocket; you just need to know where to look.
By taking advantage of different accounts, for instance, you can stop the taxman taking a cut, and even get free money added by the government. How can you resist that?
So, if you're keen to stash cash where it could potentially grow even faster, we've pulled together our eight favourite tax tips depending on your plans for your money.
The tax year runs from 6 April one year to 5 April the next, so it’s best to get cracking if you want to be quids in.
Personal Savings Allowance
Most people can earn interest totally tax-free in ordinary savings accounts. This is called your Personal Savings Allowance.
Every tax year, basic-rate taxpayers can earn up to £1,000 in interest without paying a penny in tax, while even higher-rate taxpayers can rake in up to £500 interest tax-free.
Tax breaks enable you to save more cash and get free money from the government
Individual Savings Accounts (ISAS)
Everyone can stash away up to £20,000 in the 2021-2022 tax year in Individual Savings Accounts (ISAs).
You can choose whether to keep your money in cash, use it to invest in the stock market, or have a mix of both.
Cash ISAs aren’t quite as useful as they used to be now banks and building societies pay tax-free interest under the Personal Savings Allowance mentioned above.
However, if you want to invest in the stock market, then Stocks and Shares ISAs, also known as Investment ISAs, could be worth looking into.
Any interest or dividends remain untouched by income tax, and any growth escapes capital gains tax. The taxman can’t touch any withdrawals, and you don’t even have to mention ISAs money on your tax return.
Investing in a Stocks and Shares ISA does require taking greater risk than sticking with the safety of an instant access savings account or Cash ISA because you could get back less than you put in or even lose your money. But historically, over the long term, the returns have been better, although not guaranteed.
The way the stock market bounces up and down means investing is only suitable if you can tie up your money for a good five years or more.
The golden rule with ISAs is that you can only pay into one of each type of ISA in any one tax year.
So, for example, you could divvy up your £20,000 allowance between a cash ISA and a stocks and shares ISA, and you can even hang onto accounts opened before, but you can’t add to two of the same type in the same tax year.
Lifetime Individual Savings Accounts (LISA)
As house prices soar ever higher, get a financial helping hand from the government when saving for your first home.
People aged from 18 to 39 can open a Lifetime ISA (LISA) and pay in up to £4,000 a year in savings or investments until they reach 50, and nab a 25% Government bonus on top. However, this counts towards your £20k ISA allowance. And the money can only be spent on buying a first home for £450,000 or under, or after the age of 60. Otherwise, you’ll get 25% taken off any withdrawals.
Want to be able to afford to retire? Then make sure that you grab the free money from pensions with both hands.
Women typically rock up at retirement with smaller pension pots than men, shrunk by the gender pay gap, taking time off to look after children, and opting for lower-paid or part-time roles. Brilliant.
So, it could make sense to max out your retirement savings while you can by using a pension.
For every £1 a basic rate taxpayer pops into a pension, the government will add 25p in tax relief. If you live in Scotland, the income tax bands work differently, so the amount of tax relief you’re able to claim is slightly different.
Pensions are even more generous for higher earners. If you’re a higher-rate or additional rate taxpayer, you can also claim the difference from basic rate tax, cutting the cost of your pension payments.
Plus, if you pay into a workplace pension, your boss will add extra money too, in your employer contributions.
If you’re a UK taxpayer and under 75, you can get tax relief on pension contributions of up to 100% of your earnings or up to the government set annual allowance, whichever is lower. The annual allowance is currently £40,000. Even if you don’t earn enough to pay tax, you can still pay up to £2,880 a year into a pension and get up to £720 added by the government.
The hitch is that money in a pension can’t be touched until you reach age 55 (rising to 57 from 2028). Also, the value of your investment can go down as well as up, and you could get back less than you invested.
When you come to take your pension benefits, you can usually take out up to 25% as a tax-free cash lump sum but will have to pay income tax on any other withdrawals. However, bear in mind the tax treatment you receive will depend on your individual circumstances, which could change, and tax rules might change in the future. If you’re unsure if a pension is right for you, speak to an independent financial adviser.
If you do take time out to raise children make sure you sign up for Child Benefit.
People who claim Child Benefit for a child under 12 get valuable credits towards their National Insurance record, which is important because it affects how much State Pension they get.
Child Benefit starts being withdrawn as a tax charge once the highest earner in a household rakes in over £50,000 a year and is clawed back completely when they earn over £60,000.
But don’t ignore Child Benefit if your other half is a high earner. Instead, tick the boxes to say you want the credits even if you don’t want the hassle of receiving the benefit and then paying it back in tax.
The full new State Pension is worth almost £9,340 a year right now, so it’s worth having once you reach state retirement age, and you only need to tick a few boxes.
Child Benefit can affect your National Insurance record which impacts how much State Pension you’ll get
Interest rates on savings are pretty rubbish right now, so you might prefer to stash your cash in Premium Bonds from National Savings & Investments instead.
Every pound of Premium Bonds gets entered in a prize draw each month with the tempting prospect of winning up to £1 million.
Your chances of becoming a millionaire are tiny, but there are plenty more smaller prizes, and any winnings are tax-free.
While you can cash in your premium bonds at any time, you'll earn no interest on it and always remember inflation can reduce the value of your money over time.
Help to Save
Help to Save is a special kind of savings account that can be opened by certain people entitled to Working Tax Credit or receiving Universal Credit.
You can pay in between £1 and £50 every month, although you don’t have to save every month.
The big attraction is that the government pays a bonus of 50p for every £1 saved after two years and four years.
The most you can pay into your account each calendar month is £50, which is £2,400 over 4 years. The most you can earn from your savings in 4 years is £1,200 in bonus money.
You can withdraw money if you need to, and after two years, you'll receive a bonus payment of 50% of the highest balance you achieve in this period.
For example, if the highest balance during the first two years is £500, you'll receive a £250 bonus payment.
After 4 years, you’ll get a final bonus if you have continued to save. This bonus will be 50% of the difference between two amounts – either the highest balance saved in the first two years (years one and two) or the highest balance saved between years three and four.
If your highest balance does not increase, you'll not earn a final bonus.
Make the most of the Marriage Allowance and save up to £252 a year
If you’re married or in a civil partnership snap up free cash with the Marriage Allowance. This means that if one of you is a basic-rate taxpayer and the other doesn’t earn enough to pay tax, you can transfer a chunk of your Personal Allowance (the amount you can earn before you need to pay tax) to the person who does pay tax.
In practice, this means you could reduce the overall tax bill you pay as a couple by up to £252 in the current tax year. You can even backdate your claim for up to four previous tax years, and your partner’s tax bill will be reduced depending on the Personal Allowance rate for the years you’re backdating.
When in doubt, phone the HMRC tax helpline on 0300 200 3300.
The information in this article is not to be taken as financial advice. Before making any financial decisions always do your research or speak to a financial adviser. Any tax information is our understanding of current UK taxation law which might change and the amount of tax relief you receive will depend on your personal circumstances which could change in the future.
3 things to do right now...
Check if your tax code is correct. This is used by your employer or pension provider to work out how much Income Tax to take from your pay or pension – get it wrong and it could cost you more than you’d think.
Consider increasing your pension contributions. If you don’t, you could miss out on what is essentially free money from your employer each month, as they will add to your pension fund on your behalf. You wouldn’t turn down a Christmas bonus, so don’t pass up free pension contributions.
Many of us are paying for subscriptions that we don’t use. Go through your bank statements to cancel any duds, then siphon off that money into a savings account.
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