A personal blog about life, business and money – not to be regarded as Financial Advice
So before this week’s blog dives into exactly HOW you can do this – I just to want to make sure we’re on the same page.
I’m talking a £40k+ income without paying tax that is both legal AND ethical.
No dodgy scams or tax avoidance (which, if you know me at all, you’ll know is a million miles from how we operate!).
Because the key here is maximising your tax allowances.
We all have tax allowances. They may not sound glamourous or exciting, but very few people use them to their full extent (or even know what they are).
Which truly is missing a trick, when it comes to planning and maximising your finances!
Here’s how it works.
Every year, you don’t have to pay tax on:
- £12,500 personal allowance, from your earned income;
- £1,000 personal savings allowance (interest earned on your bank accounts);
- £2,000 dividends – like from a sale of shares, or drawn down from your business as part of your salary package;
- £12,000 Capital Gains Tax (CGT) – from the sale of your assets, like a rental / second property or antiques;
- £7,500 from renting a room, on the Government ‘Rent a Room’ Scheme;
- And £5,000 starter rate for savings (again from interest in bank accounts – but this does disappear as your earnings increase over £12,500).
Some or all of the tax allowances will apply to you. The key is understanding what allowances are available and how best to use them – which this blog will help you with.
So HOW do you get OVER the £40,000 I mentioned?
Well – this is where ISAs come into play!
There’s common misconception that ISAs are complicated. But really, they’re pretty straightforward.
An ISA is a savings or investment account, that you never pay tax on.
With a Cash ISA, for example, this can save you HUGELY.
- For basic-rate taxpayers, you’d usually be taxed 20% of all interest earned over your £1,000 Personal Savings Allowance.
- For higher-rate taxpayers, it’s 40% of all interest earned over your £500 Personal Savings Allowance.
- And for additional-rate taxpayers, it’s 45%, with no Personal Savings Allowance available.
So it really does stack up!
With ISAs, you can save up to a maximum of £20,000 per year (for 2019/20), tax free, from April to April. This could be in a:
- Cash ISA (including a Help to Buy ISA);
- Lifetime ISA;
- Stocks and Shares ISA;
- An Innovative Finance ISA;
- Or any combination of any of these (for example, £14,000 in Cash ISA + £6,000 in a Stocks and Shares ISA – as long as your total tax-free ISA savings don’t exceed £20,000 in any one tax year).
You MUST save or invest by the end of the tax year, 5th April, to see the benefits. If you don’t use your full £20,000 allowance, it does NOT roll over – so you’ll get your new allowance for the next tax year, but you won’t be able to add anything extra to make up.
Once you’ve paid into your ISA, your money will keep earning interest and your tax allowance benefits will continue until you withdraw it.
Let’s take another example. Let’s say you invest £20,000 of your income into a Stocks and Shares ISA:
- Any income earned from dividends from shares within your ISA is free of Income Tax – with no limit, compared to just your £2,000 dividend tax allowance if you held the shares outside the ISA wrapper;
- There’s NO Capital Gains Tax to pay – when you withdraw money from your ISA, even if it means you sell some shares for more than you bought them for, compared to just your £12,000 CGT allowance otherwise.
So by using your full ISA allowance and paying in £20,000 a year, you’re effectively shielding this income from the tax man. And when the time is right, you could pull out UNLIMITED money from your ISA with no further tax to pay – your ONLY limit is how much you’ve saved!
As I said before, the key is knowing exactly what allowances ARE available to you, and how best to use them.
Having the right financial advice can make a huge difference to the cash in your bank account. As this example illustrates perfectly:
“Research* shows the average UK income in retirement is £19,000 per annum. But for those who set goals working with a financial adviser, the average is £26,000. Put another way, by not working with a financial adviser, a client can potentially lose out on an extra 36.8% or as much as £157,000 over the course of a 21-year retirement”
*Old Mutual Wealth / YouGov survey, July 2014
So if you’d like to chat more about maximising YOUR tax allowances, minimising the tax you pay and planning for a greater income, we’d love to help.
And honestly, even if saving the full £20,000 feels a long way off right now – it’s NEVER too early to start planning and feeling more in control of your own financial future!
Until next time,