Tax strategies are important for anyone who wants to keep more of their income to enjoy a better life. They’re not always easy to create though, but with wealthy Scots paying more in income tax than high earners elsewhere in the UK, they’re worth creating to weather the rising tax take.
To help, we’ve put together this comprehensive guide for you – tailored to Scots. We’ll cover the key strategies, including pension contribution, utilising all available allowances, tax-efficient investments and more. Let’s take a look so you can make a strategy that works for you.
Using your allowances
Let’s start with the basics. Most taxes come with an allowance, which shields a certain portion of your income streams outright; anything outside the allowance is what is taxed. Applying these is easy to do, always available, and most importantly, a great first step to reduce your tax burden. The most important allowances are:
- Personal allowance: Scottish income tax is not fully devolved, so the personal allowance here is the same as across the UK (£12,570 for the 2024/25 tax year).
- Capital gains: When you sell an asset, you pay capital gains tax. However, you benefit from the capital gains tax allowance, which is £3,000 in the 2024/25 tax year. This is one to watch for, as it was £12,300 before it was reduced to £6,000 on 6 April 2023; in other words, the allowance is abnormally low. The last time it was £3,000 was in 1981/82. You may therefore want to wait for the sale of certain assets, although we can’t promise that the allowance will increase.
- Dividends: Dividends paid out to shareholders of limited companies are taxed through dividend tax. There is also an allowance, which is £500 for the 2024/25 tax year.
- Marriage allowance: If you or your spouse/civil partner earn less than the personal allowance, you can transfer up to £1,260 of your personal allowance to the higher earner, reducing their tax bill by up to £252.
Pension contributions
Making pension contributions is one of the most effective tax planning strategies as they benefit from tax relief at the individual’s highest marginal rate. This can lead to substantial tax savings, especially for professionals in the higher or top tax bands.
So, if you’re a basic rate taxpayer and make a pension contribution of £800, the government will give you an extra £200 to give you a final contribution of £1,000 (because 20% of £1,000 is £200). Starter rate taxpayers also get relief at 20%.
Meanwhile, someone paying the top rate of tax aiming to put away a total of £20,000 would only have to pay £10,400. This is a brilliant way to save money, so if you have extra income and are unsure about what to do with it, why not put it into your pension pot?
You should just know that there is an annual allowance for pension contributions, which you’ll remember shields from tax: in this case, any portion of yearly contributions that go above £40,000 do not qualify for tax relief. There is no penalty for going over it, though.
Tax-efficient investments
Investing is a great way to boost your income, and you can invest in tax-efficient ways. Consider the following options:
- Individual savings accounts (ISAs): ISAs allow you to invest up to £20,000 without paying income tax or capital gains tax on the returns.
Enterprise investment scheme (EIS) and deed enterprise investment scheme - (SEIS): These schemes offer generous tax relief to investors who purchase shares in smaller, high-risk companies. EIS gives you 30% on income tax; SEIS gives you 50% relief.
- Venture capital trusts (VSTs): Investing in VCTs provides 30% income tax relief on investments up to £200,000 per tax year and tax-free dividends and capital gains.
Need help with your tax strategy?
We’re experienced accountants who specialise in navigating the complexities of Scottish tax regulations. Whether you’re a professional looking to optimise your tax strategy through pension contributions, tax-efficient investments, or maximising allowances, we’re here to help.
Our tailored approach ensures you understand your options and make informed decisions to minimise tax liabilities while remaining compliant. Let us help you in developing a personalised tax plan that aligns with your financial goals.
Talk to us about your tax strategies.