Six end-of-tax year strategies to avoid ‘sneaky traps’ and cut your bill

As the end of the year draws closer, experts are urging taxpayers to consider a range of tax-efficient strategies to make some .

Sarah Coles, head of personal finance at , warns of the “sneaky traps” awaiting higher-rate taxpayers.

Ms Coles said: “The taxman has set an array of sneaky traps for millions of higher-rate taxpayers. They’ll be painfully aware of the trap, which has plunged almost two million more people into paying higher-rate tax since April 2021. However, there are other more stealthy traps ready to catch them and empty their pockets.”

Frozen tax thresholds and diminishing allowances are pushing more people into higher tax brackets. For example, the higher-rate tax threshold has been frozen at £50,270 since April 2021, even as wages have risen 22% since then. If the threshold had kept pace with wage inflation, it would now be £61,329.

Despite these challenges, there are effective ways to reduce your tax bill. Ms Coles shared six strategies to consider before the tax year ends on April 5.

Pay into a pension

Higher-rate taxpayers can claim tax relief at their highest marginal rate, making contributions a powerful way to reduce taxable income.

You can pay up to £60,000 into your pension this tax year and carry forward unused allowances from the previous three years.

This is especially valuable as the higher-rate tax threshold remains frozen at £50,270, meaning anyone earning above this pays 40% income tax. Reducing taxable income through pensions can ensure you stay below the threshold or minimise the impact of rising wages on your tax bill.

Escape the High-Income Child Benefit Charge

The high-income child benefit charge kicks in at £60,000. If your income (or your partner’s) has exceeded the threshold, and you receive , you will need to repay at least some of it through self-assessment. Once you earn £80,000, you need to repay it all.

Contributing to your pension can help lower your adjusted net income, potentially keeping it below the £60,000 threshold and preserving more of the child benefit.

However, Ms Coles emphasised that for those not working, it’s still crucial to claim child benefit if eligible – even if you waive the payments – as it .

Use pensions to stay below the £100,000 threshold

Earning over £100,000 triggers a tapering of your personal allowance – cut by £1 for every £2 above this level. By earning £125,140, you lose your entire personal allowance, resulting in an “effective” tax rate of 60%, according to Ms Coles.

This threshold has remained the same since it was introduced in 2010, even though wages have risen by 60%. If it had risen with wages, Ms Coles said it could now be £160,000.

By paying into your pension, you can reduce your income below £100,000 and restore your full personal allowance, saving significant tax. For example, if your income is £101,000, paying £1,000 into a pension brings your income down to £100,000, saving you £400 in tax relief and an additional £200 in preserved personal allowance.

This strategy also helps parents retain eligibility for tax-free childcare, worth up to £2,000 annually, which is lost once earnings exceed £100,000.

Maximise your capital gains tax allowance

thresholds have been sharply reduced, falling to £3,000 in the current tax year from £12,300 in 2022/23. Gains above this level are taxed at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.

If you have investments outside an Individual Savings Account (), Ms Coles suggested considering selling assets to realise gains up to the allowance. Using the Bed and ISA process, the tax expert said you can reinvest the proceeds into an ISA, sheltering future growth from CGT. You can also offset losses against gains and carry forward unused losses for future use.

Shelter income-producing assets in ISAs

Dividend and savings tax rules have become increasingly burdensome. The dividend tax allowance has fallen to £500 this year, down from £5,000 in 2017/18, while the personal savings allowance remains at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.

Ms Coles recommended transferring income-producing investments into a stocks and shares ISA, which allows taxpayers to shield their dividends from tax. Higher-rate taxpayers face a dividend tax of 33.75%, while basic-rate taxpayers pay 8.75%. By using an ISA, any dividends received are tax-free, up to the £20,000 annual contribution limit.

Similarly, cash ISAs protect your savings interest from tax, with the same £20,000 contribution limit.

Plan as a couple

Married couples and civil partners have several opportunities to reduce their tax burden. Ms Coles said: “If you’re married or in a civil partnership and your partner pays a lower tax rate, you can transfer income-producing assets into their name. It means you can both take advantage of your tax allowances.”

Eligible couples can also claim the , which lets a lower-earning partner transfer up to £1,260 of their unused personal allowance to a higher-earning partner, .

Couples should also consider utilising tax-efficient vehicles like ISAs, pensions, and Junior ISAs for their children to maximise tax savings.

This article is not intended as financial advice. Readers should consult a qualified financial adviser for guidance tailored to their individual circumstances.