Unexpected tax traps to watch out for – and how not to fall into them

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With a rule book thousands of pages thick and regulations seemingly changing all the time, the UK’s tax system is famously complex. It means that for many people, tax represents much more of a threat than an opportunity, with pitfalls at every turn.

From investing in a way that incurs much more tax than is necessary to making pension-income decisions without being aware of potentially expensive tax implications, even the most financially savvy among us can fall foul of the UK’s many tax rules and regulations. The full list of errors to avoid and opportunities that shouldn’t be missed is a long one! But here are some of the most common and costly tax traps to look out for.

Forgetting to share the load

Most tax allowances, exemptions and tax-efficient investment opportunities are available to each person in a couple. For example, if only one person in a couple has used up their ISA allowance for the current tax year, they can gift some money to their partner who has some or all of their allowance left. The same approach can be taken to each person’s annual Capital Gains Tax (CGT) allowance.

Leaving it to the last minute

Many of us are in the habit of paying attention to our allowances only at the beginning or end of the tax year. Don’t leave it too late as you could miss out on allowances and exemptions that can’t be carried forward.

Saying no to free money

A surprising number of people forget (or decide not to) to reclaim certain payments to which they’re entitled. For example, some higher-rate and additional-rate taxpayers fail to reclaim the pension tax relief they’re due, while the tax relief offered on gifts to charities can also be overlooked.

Getting caught by the 60% rate

The way the personal allowance works creates what’s effectively a 60% Income Tax rate on earnings between £100,000 and £125,140. That’s because if you earn £100,000 or more, your £12,570 personal allowance is reduced at a rate of £1 for every £2 above £100,000. So, for every £100 of income between £100,000 and £125,140, you get only £40 to take home, with £40 taken through Income Tax and another £20 lost due to the gradual removal of the personal allowance – amounting to an effective tax rate of 60%. One of the most common ways to mitigate this is to reduce your taxable income by using allowances such as your pension.

Avoiding the pitfalls

Perhaps the best way to ensure you don’t fall into any tax traps is to plan ahead, ideally with the help of a professional financial adviser.

Please don’t hesitate to contact us at Rhodes Brook Financial if you wish to talk through your own tax-saving strategy.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

Rhodes Brook Financial Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website: www.sjp.co.uk/products.

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