5 ways to pay less tax - regardless of the Budget

Speculation about the Autumn Budget is reaching fever pitch. Barely a day goes by without rumours of a tax rise or pension change. These reports should be taken with a heavy pinch of salt. Nothing is certain until the government announces its plans on Wednesday, 26 November.

• Read: What can we expect in the Autumn Budget?

 In the meantime, here are some evergreen ways to shelter your savings from the tax man.

1. Tax-free accounts

ISAs protect your savings and investments from tax. You can add £20,000 to them every tax year, splitting your allowance between cash and equities however you choose.

It is rumoured that the government will change this. While the overall ISA limit is not expected to budge, Chancellor Rachel Reeves may reduce the cash ISA allowance in her Autumn Budget. This would form part of a plan to turn savers into investors.

• Read: How to make cash-like returns - without a cash ISA

Whether or not this happens, ISAs remain a powerful way to grow your wealth. They allow you to earn dividends and interest without paying any income tax. Similarly, when you sell your ISA investments, you don’t have to pay any capital gains tax (CGT).

If you have children, you can also set up a Junior ISA, or JISA. These are available for under 18s and must be set up by a parent or guardian before the child turns 16. The current JISA allowance is £9,000 a year, and anyone can contribute to the pot once it has been created.

• Open a Stocks and Shares ISA
• Open a Junior ISA

2. Pensions

When you pay into a workplace pension or a SIPP, you benefit from pension tax relief. This helps you save for retirement with money that would otherwise have gone to the tax man. 

Today, a £1 contribution to a pension typically costs you 80p if you are a basic-rate taxpayer. This drops to as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax.

How you claim this relief depends on how much you earn, what rate of income tax you pay, and what type of pension you have. While basic rate tax relief is always applied to pension contributions, if you are a higher or additional rate taxpayer you may need to claim your extra tax relief back from HMRC. This is particularly relevant if you are investing into a SIPP. 

When you eventually start to withdraw your pension, you will face a bill. Up to 25% of your pension pot is usually tax free (up to your lump sum allowance) and you pay income tax on the rest.

How might the government change pensions?

As with ISAs, there has been a lot of speculation around how the government could tinker with pensions. Whatever happens, however, they will remain an important way to save for retirement - with plenty of tax perks attached.

• Open a Self-Invested Personal Pension (SIPP)

3. Premium Bonds

Premium Bonds are the UK's most popular savings product - despite paying no interest. Issued by NS&I, the government-backed savings provider, they dole out prizes instead, ranging from a meagre £25 to a whopping £1m. You can hold £50,000 of bonds in total.

Should you buy Premium Bonds now?

There is a big question mark over whether premium bonds are a good investment. NS&I publishes an ‘annual prize fund rate’, which currently sits at 3.6%. This is the average return received by Premium Bond holders each year. However, you won’t necessarily get that rate. Some people will be very lucky, and others will be unlucky.

A key reason why people buy Premium Bonds is the chance of hitting the jackpot - two people win £1m every month. There is another big perk, however: tax. You don’t have to pay any CGT or income tax on your premium bond winnings. If you do win a million, therefore, it will all end up in your pocket.

4. Gilts

A gilt is another name for a UK government bond. One of the main reasons people hold gilts is for income. They pay regular ‘coupons’, or cash payments, which are either fixed or inflation linked.

Assuming they are not held in a tax-free wrapper (such as an ISA) these payments are subject to income tax. However, you do not have to pay any CGT on gilts. This is true whether you hold them to maturity and make a profit or sell them before they mature and make a profit. In other words, any increase in a gilt’s price is tax free.

This is particularly beneficial if you are a higher or additional rate taxpayer.

5. Useful allowances

There are various ways to proactively lower your tax bill. However, you may already be entitled to earn £1,000 of interest tax free - depending on your income tax band. This is due to the Personal Savings Allowance (PSA).

The PSA is the total amount of interest you can earn on your savings each tax year (excluding ISAs) without paying tax on that interest. If you are a basic rate taxpayer, it is set at £1,000. This applies to interest from banks and building societies, as well as things like trust funds and life annuity payments¹.

As your income rises, however, your personal savings allowance drops.

There are also some useful investment buffers. For example, you have an annual CGT allowance of £3,000, regardless of your tax band. You may also be able to reduce your tax bill by deducting losses. Sadly, for investors, the CGT allowance has become far less generous in recent years, having peaked at £12,300 a few years ago².

You can also earn some dividend income each year without paying tax. The allowance is currently £500, regardless of your tax bracket.

Source:

^1,2 GOV.UK

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• Read: How to make cash-like returns - without a cash ISA
• Read: Peak salary age is 47: are you prepared?
• Read: How to make the right decision on taking pension tax-free cash

Important information: - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.