Common Tax Mistakes and How to Avoid Them

As the tax year draws to a close, it is imperative for individuals to be vigilant about potential errors that may have significant financial consequences. Shona Lowe, a financial planning expert at abrdn, has identified four major tax mistakes and provided guidance on how to avoid them.

One common mistake is the failure to fully maximise pension benefits. By increasing contributions to their employer’s pension scheme, individuals can benefit from tax savings as these contributions are deducted from their gross pay before any tax is applied. Furthermore, the government adds the tax amount that individuals would have paid on top of their pension savings, essentially offering a tax-free bonus for retirement savings. For self-employed individuals, it is essential to arrange personal pension contributions to take advantage of these benefits and reduce their self-assessment tax liability.

Another critical error to avoid is leaving too much of an inheritance subject to tax. Although making gifts is customary, it is important for individuals to recognize that the value of these gifts may not immediately reduce the taxable value of their estate. Because different types of gifts are subject to different rules, maintaining comprehensive records is crucial in these circumstances. Additionally, having an up-to-date will and power of attorney in place is advisable to ensure that individuals have expressed their wishes regarding their pension savings in the event of their passing.

Effective management of capital gains tax is another area that requires careful consideration. By holding investments within a tax-efficient wrapper, such as a stocks and shares ISA or pension, individuals can avoid capital gains tax on the growth of their investments. Seeking expert advice in these situations is often essential for managing tax liabilities effectively.

Lastly, failing to utilise the ISA allowance is a mistake that individuals can easily avoid. Whether through a cash ISA for an emergency fund, a stocks and shares ISA for long-term financial goals, or a Lifetime ISA for saving towards a first home, there are various options available. It is also important to note that children and grandchildren have their own Junior ISA allowance of £9,000, presenting an excellent opportunity for family members to invest in their future.

In conclusion, as the end of the tax year approaches, it is crucial for individuals to be proactive in reviewing their financial arrangements to ensure that they are maximising their tax benefits. By taking advantage of pension perks, managing inheritances, being mindful of capital gains tax, and utilising the ISA allowance, individuals can safeguard their wealth and establish a more secure financial future.