How to avoid paying over-the-odds in tax - Sarah Coles

The good news is that, unlike the need to memorise the periodic table or be able to recite endless Shakespearean quotes, it’s not too late. You can still get everything sorted for the end of the tax year and avoid paying over-the-odds in tax.

Last-minute ISAs

Each year we have a £20,000 ISA allowance to take advantage of. Within that, 18-39-year-olds can put up to £4,000 into a Lifetime ISA, and there’s still plenty of time to do either. You can open or pay into an ISA online until midnight on the 5th, with just a debit card and your National Insurance number.

If you’re opening an ISA at five minutes to midnight, it’s not necessarily the ideal time to be thinking clearly about your investment strategy, so it’s really helpful to split the decision to open an ISA to protect your allowance, and the choice of where to invest. Before the deadline expires, you can put money into a stocks and shares ISA as cash, and move into your chosen investments when you’re ready.

This makes perfect sense if you want to invest in the next few weeks or months, or drip-feed the money into investments over time. However, if you plan to leave it all in cash for a considerable period, it it’s worth considering a cash ISA instead. We’ve had a much more competitive cash ISA season than we’ve had for some time, so you can get a strong rate that protects your ISA allowance, and then transfer into a stocks and shares ISA when the time is right.

Rising interest rates have also tipped the balance for an awful lot of savers, who have previously been happy in a savings account, but may want to consider a cash ISA instead. It’s a no-brainer for additional rate taxpayers – assuming they have the allowance spare. They don’t get a personal savings allowance, so pay 45% tax on savings interest, and tend to be better off in a cash ISA than an equivalent savings account – regardless of how much they have in savings.

Now that the most competitive fixed rates have pushed over 4.5%, it means basic rate taxpayers and higher rate taxpayers also need to consider tax. Even with a personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, they may end up paying tax on some of their interest. You need to factor in the fact that cash ISA rates tend to be slightly lower than their savings account equivalents, but if you have substantial savings, they may still make sense.

For those with investments outside ISAs

If you have investments outside an ISA or pension, there’s even more impetus to act, because you risk being hit by cuts to tax allowances from 6 April. In the current tax year, you can make gains of £12,300 before you pay capital gains tax (CGT) on them, whereas from April 6 this drops to £6,000. Right now, you also have a dividend tax allowance of £2,000, which drops to £1,000 in the next tax year. An ISA can help protect you from both.

You can use the Bed and ISA process to move these assets into an ISA. Just make sure that any assets you sell when switching into the ISA don’t bust your CGT allowance. It’s worth checking the deadline for making an application for this, because often you’ll need to send in your application earlier.

If the assets outside an ISA are shares from a Sharesave scheme or Share Incentive Plan (SIP), then there’s an extra rule you can take advantage of. As long as you transfer the shares into an ISA within 90 days of the scheme maturing, there won’t be any CGT to pay on them.

Last minute pensions

ISAs aren’t the only consideration at this time of year. You might think it’s less of a priority to use your pensions annual allowance of up to £40,000 this year, because next year it rises to £60,000, but the secret to amassing a large enough pension is relentless consistency. If you do the right thing every year that you can afford to, you won’t end up having to do anything superhuman to make up for lost time. And paying into a pension isn’t just about building your pot, it also comes with handy tax advantages.

It’s particularly useful if you’re a higher or additional rate taxpayer, because it effectively extends the tax band below yours by however much you pay in. As a result, it can push people out of paying higher rate or additional rate tax altogether.

If you’re lucky enough to earn over £100,000, it has an extra benefit. From £100,000, you start to lose your personal allowance - at £1 for every £2 you earn over the threshold. It’s an effective interest rate of 60% on everything between £100,000 and £125,140. However, when the taxman is working out whether you earn over £100,000, he considers your ‘net adjusted income’, which subtracts any pension contributions. So the more you pay into your pension, the less of your personal allowance you’ll lose. If you can bring your ‘net adjusted income’ back below £100,000 with pension contributions, parents may also keep their eligibility to tax-free childcare too.

The high-income child benefit tax charge works on the basis of your net adjusted income too. If you are a parent earning between £50,000 and £60,000, cutting back towards £50,000 means you can reduce this tax charge too.

It’s not too late to make a difference, and cut your tax bill, with clever use of your ISA and pension allowances before the end of the tax year. Whether the same can be said about those GCSEs remains to be seen.

Informal carer numbers soar

Figures out recently from the ONS revealed that the number of female carers was up half a million in a year – to 3 million, and the number of male carers soared 200,000 to 1.9 million. It means almost five million people have caring responsibilities.

It takes a real toll, physically, mentally and financially. Only half of carers work – and only a third work full time. For the 16% of informal carers who are also sandwich carers – juggling care and work is even harder.

Given that the most common age to become a carer is between 55 and 64, it’s a huge part of the reason why so many people of this age are dropping out of the workforce. This not only causes enormous problems for their finances while they’re caring, but it’s also contributing to an alarming gender pensions gap. For the economy more widely, it is feeding into a shortage of labour, which risks pushing up wages and prices even further. Clearly with care driving significant levels of economic inactivity, solving the myriad of problems with the care sector is a vital part of getting people back to work.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHargreaves Lansdown