Tax Freedom Day is moving – Ginkgo Financial Ltd
May 23, 2022

Tax Freedom Day is moving

"They can never take our freedom". Whilst that is true, they can and certainly seem to be moving it back each year! I’m talking about Tax Freedom Day specifically.

"They can never take our freedom". Whilst that is true, they can and certainly seem to be moving it back each year! I’m talking about Tax Freedom Day specifically.

In 2020 Tax Freedom Day was May 28th, last year it was the 31st of May. Whilst the calculations have not yet been done for 2022,  it’s likely to be sometime later in June. But exactly what is Tax Freedom Day and why does it matter that it’s getting later each year?

Tax Freedom Day is the date at which the ‘average’ earner will have paid ALL their taxes (income, NI, VAT, fuel, council tax etc), leaving the rest of their earnings available to spend on themselves.

The Adam Smith Institute have been calculating the total annual tax paid by the ‘average’ earner since the mid ’60s, although truly accurate figures have only been available since 1995 and as you can see from the graph, Tax Freedom Day has trended later each year since that point.

Of course, it’s worth noting that this is based on the so called ‘average’ earner, so everyone’s Tax Freedom Day will differ and there are several legitimate, HMRC approved ways to reduce the amount of tax you pay and therefore shift your personal Tax Freedom Day to earlier in the year, thus giving you more of your earnings to spend however you wish.

Check the basics

Firstly, check you’re on the right tax code (I know it’s an obvious one, but you’d be surprised how many people aren’t) and then check you’re claiming the correct allowances, especially if you’re married and your partner is a non-taxpayer. It’s also a good idea to check any assets or liabilities are held in the most effective way between the two of you.

Don’t forget to max out your ISA

ISAs are tax-efficient savings and investment accounts, and you can use them to save cash or invest in stocks and shares. Your annual allowance is £20,000 and you can either pay it all into a Stocks & Shares ISA or Cash ISA or a combination. You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax.

For those under 40, it is worth considering taking out a Lifetime ISA (LISA). These provide a 25% bonus from the government if the money is used for a house purchase or retirement. And, as it’s an ISA there’s no tax on the interest earned.

Prep the pension

One of the best things about using a pension to save for retirement is the tax relief. When you pay into your pension, a portion of the money that would have gone to the government as tax goes towards your pension instead.

Higher rate taxpayers and additional rate taxpayers can claim tax reliefs at 40% and 45% respectively on pension contributions.

Not only does this help reduce the amount of tax you pay, but it can also help boost your savings for the future. Check back over previous years, as this is not always done automatically, and you may have to claim it back yourself.

If you’re part of a company pension, consider making  the contributions  via salary exchange to reduce your NI contributions.

Make use of your CGT allowance

Finally, make full use of your annual Capital Gains Tax allowance (CGT). Once again check ownership of your assets and combine your allowances where possible. Consider splitting any gains over multiple years or maybe even consider the use of investment bonds.

Whatever option(s) you may wish to consider, I cannot stress this enough, take advice! Taxation is very complicated. The rules, reliefs and allowances often change. An expert will be able to help you plan your taxes in advance and come up with effective strategies that will use the lawful reliefs and allowances to minimise the amount you pay.

By Daren Wallbank

Tax treatment varies according to individual circumstances and is subject to change.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.
Stocks and Shares ISAs invest in Corporate bonds, stocks and shares and other assets that fluctuate in value.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
The Financial Conduct Authority does not regulate tax advice.

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