As mentioned last week, there are several legitimate tax breaks sanctioned by HM Revenue & Customs (HMRC) that savers could use to reduce their income and inheritance tax (IHT) liabilities.
One way would be to use investment bonds, which are life insurance policies where the individual invests a lump sum in a variety of funds, some of which run for a fixed period and some of which have no set term.
When the individual cashes in a bond, their return depends on how well or badly the investment has performed. Any gains or income earned are taxed at 20 per cent, while withdrawals of up to 5 per cent a year are allowed for up to 20 years without incurring an additional tax charge.
Another way of maximising tax relief for anyone who owns a company would be to buy an electric car. Small businesses that buy electric cars with CO2 emissions of less than 50g per kilometre can claim a capital allowance worth 100 per cent against the purchase, so the entire cost of the car can be deducted from company profits. The car can also be used for personal journeys free of tax from 6 April and incur a benefit in kind (BiK) charge of 1 per cent in 2021 and 2 per cent in 2022.
Couples can also benefit from tax exemptions to a reasonably large amount. For example, two sets of personal income tax allowance is £25,000. The annual capital gains tax (CGT) for a couple is £24,000, the dividend allowance is £4,000 and savings allowances are £2,000. Added up, this comes to £55,000, although it should be noted that the savings allowances go down to £500 for higher-rate taxpayers and to zero for additional-rate taxpayers.
Next week we will explore more ways of maximising tax relief benefits.