Road to Wealth #4 - Feel the Fear of Taxes But Do It Anyway
💸 Taxes. That word alone can send shivers down your spine. But today, with the help of Chartered Financial Planner Lisa Conway-Hughes, we’ll try and make taxes a little less scary for you. Lisa provides valuable insights on avoiding common mistakes, staying organised, and ensuring you have sufficient funds.
Lisa shares her expertise on tax-efficient saving and investing, pensions, and the art of gifting. Join us as we explore navigating the often anxiety-inducing process of filing tax returns while gaining a fresh perspective on effective financial strategies.
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“You need to be careful that if you are opting for more hours at work or you’re going for a pay rise, make sure to use a salary calculator online.”
HOW DOES IT ALL WORK?
Firstly, there’s the personal allowance, which is the amount that you are allowed to earn tax-free. For most people that's just over £12,500, so you pay 0% tax, and then all of the earnings between that bracket and then just over £50,000, that's the basic rate tax bracket. There, you're paying 20% on that slice.
If you earn £49,000, you've got some in the zero, some in the 20%. Between £50,000 and £100,000, that's the high rate tax bracket, which is where you're going to pay your 40% tax.
Then there is the bracket between £100,000 and £125,000 where you pay the equivalent of 60% tax.
Many people who are in that highest bracket don't even know they're in it. That tax bracket is for every pound you earn over a hundred thousand pounds; you lose 50p of that personal allowance. So when someone's earning £125,000, they have zero personal allowance.
You need to be careful that if you are opting for more hours at work or you're going for a pay rise, make sure to use a salary calculator online. Because some people, especially in that 60% tax bracket, would be better off emotionally and not that worse off, financially going down to four days.
tax deductions and common mistakes
When itcomes to deductions, the big one is pensions. Also, don't forget to claim for professional fees and subscriptions, you can put those on your tax return.
Charitable donations, they're really important, especially if you're high rate tax pay and you've ticked that gift aid.
When it comes to mistakes, many people don't realize you have to pay tax on savings, so they forget to put their savings interest on their tax return. If you are a basic rate tax base, earning under that £50,000 threshold, you are allowed to make a thousand pounds a year in interest.
People also forget to use their capital gains tax allowances, which is really important.
Don’t forget that if you call HMRC, they will help you with any questions you have.
Keep everything, make it as simple as possible for you. Don’t forget if it's just too much of a headache, and it causes you too much stress, it takes a couple of hundred quid to pay an accountant for a tax return.
self-employment, affordability and logistics
Be prepared for that first payment on account. If you have a really good year and you take a jump up, your payment on account is going to reflect that the following year. Just be prepared and forewarned with that.
If you find it quite stressful and it's all very new, maybe for the first few years, get an accountant to do it for you.
Next, definitely start pension contributions. We know there's a big problem with the self-employed not having a pension.
If you’re struggling with payments, the first thing you need to do is be open with HMRC. This will really help you make sure you're not getting fined.
They have a system called time to pay, which means if you get in touch with them, they can set up a payment plan.
In terms of making the most of your taxes, don’t forget about your ISA allowance. You get £20,000 a year tax free.
When it comes to charitable donations, say you gave £80 to charity, the tax man will give £20 to the charity on your behalf. So the tax relief you've paid also goes to charity.
You need to add on your charitable giving into your tax return every year to make sure that it is rebalanced for you.
If you are married, you want to keep all of the taxable things in the lowest earner’s name.
Generally, the perfect trio to manage your money would be having an accountant, a solicitor, and a financial advisor - who would all work together to make sure that your needs are maximized. And don’t generalise and assume all accountants are boring - there are accountants out there that will speak your language, that will take the time to help you understand things, because essentially it's in their interest.
Shop around and find someone that speaks your language, maybe speak to friends and see if they've got a recommendation.
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LISA CONWAY-HUGHES
Lisa Conway-Hughes is a Chartered Financial Planner and a Fellow of The Personal Finance Society. Lisa joined the financial industry 16 years ago and in October 2020 was voted Financial Adviser of the Year and Marketing Influencer of the Year – London by Professional Adviser Magazine – WIFA. Lisa, also known as Miss Lolly, writes, speaks, tweets, and blogs on all things money related. Lisa is passionate about making financial education open to all and loves taking the jargon out of the financial world.