Spring clean your finances in 6 easy steps this week | Personal Finance | Finance

We’re into the busiest part of the year for our money, as Chancellor Rachel Reeves prepares next Wednesday’s Spring Statement, which will be swiftly followed by the end of the tax year on April 5.

It’s important to be prepared, with taxes at a 70-year high and rising and state benefits under attack as Reeves battles to balance the books. Thousands of pounds are at stake in tax relief, as well as other vital exemptions and allowances. Here’s your complete guide to keeping your money out of the Chancellor’s clutches.

Use your ISAs

In the run up to Spring Statement, there have been rumours that Reeves will cut the Cash ISA allowance to just £4,000.

She might even extend the income tax threshold freeze from 2028 to 2030. We won’t know until the day.

Either way the tax increases Reeves announced will take their toll, warns Myron Jobson, senior personal finance analyst at Interactive Investor. “Now is the time to fight back. There’s plenty you can do.”

A key step is to maximise your ISA contributions before the tax year ends on April 5, Jobson said. “All the speculation over Cash ISAs serves as a timely reminder to use this brilliant opportunity to avoid paying tax on your savings and investments for life.”

Every adult can pay up to £20,000 a year into an ISA, plus up to £9,000 in a Junior ISA for under-18s.

All capital gains, dividends and interest are tax-free for life, making this a hugely valuable benefit.

We’ll explore your options further tomorrow in our special ISA guide.

Good to know: The ISA allowance is issued on a use-it-or-lose-it basis. Miss this year’s midnight deadline on April 5, and your £20,000 tax break is gone for good. This could be an even bigger blow if Reeves cuts it next year.

Claim pension tax relief

Pensions contributions attract tax relief at either 20%, 40% or 45%, depending on your tax band.

This means a basic rate taxpayer only pays £80 for each £100 of pension they put away, while a higher-rate taxpayer pays just £60.

“By making contributions attract you effectively boost your retirement savings with ‘free’ government money,” Jobson said.

Everybody gets 20% tax relief automatically, while higher earners must claim additional relief via their tax return.

You can contribute up to 100% of your annual income, to a maximum of £60,000 a year. That’s known as the annual allowance.

Under ‘carry forward’ rules, savers can mop up any unused annual allowance from the previous three tax years, once they’ve used up the current year’s.

Money rolls up tax-free inside a pension. When withdrawals start from age 55, 25% of the pot can be taken tax-free. Further withdrawals are taxed as income, but careful planning can minimise the bill.

Good to know: Once you start making pension withdrawals, the maximum you can invest falls from £60,000 to £10,000 a year under the Money Purchase Annual Allowance (MPAA). 

Cut your income tax bill

With income tax thresholds frozen until at least 2028, millions have been dragged into higher tax bands, a process known as fiscal drag.

Jobson said: “This is the ultimate stealth tax, as people might not realise they’re paying more simply due to inflation.”

Fiscal drag is pushing millions into higher tax brackets but making pension contributions could pull you back below it again, by reducing your taxable income.

It can also help protect your Personal Savings Allowance (PSA), the amount of interest you can take tax-free each year.

The PSA is £1,000 for basic-rate taxpayers but falls to £500 for higher-rate taxpayers and disappears entirely for additional rate 45% taxpayers.

Using pension contributions to remain in a lower income tax bracket can help preserve your PSA.

Those earning between £100,000 and £125,140 face a punitive 60% effective tax rate as their personal allowance is steadily withdrawn, Jobson said. “Making pension contributions could reduce your taxable income, and your exposure to this charge.”

For parents, this strategy could also help them remain eligible for Free Childcare and Tax-Free Childcare schemes.

Similarly, pension contributions can help those at risk of losing Child Benefit due to the High Income Child Benefit Charge, which kicks in when one parent earns more than £60,000.

Good to know: If you’re still working, paying more into a company pension via salary sacrifice also saves on National Insurance. This may impact entitlements like maternity pay or mortgage applications though, so check first.

Claim your Marriage Allowance

The Marriage Allowance allows one spouse or civil partner to transfer up to £1,260 of their personal allowance to the other, saving £252 if eligible.

Claims can be backdated for up to four years, if eligible during that period. That could bag you a handy £1,000 lump sum.

Good to know: If you plan to backdate, it’s even more vital to put in a claim before this year’s April 5 deadline. Otherwise you could lose a year’s allowance.

Save on capital gains tax

Capital gains tax (CGT) is sometimes called the “forgotten tax”, yet it cost Britons more than £14.5billion last year.

That’s almost double the total inheritance tax take.

CGT applies when selling assets such as a second home or buy-to-let investment property, as well as shares held outside of a tax-free ISA, cryptocurrency such as Bitcoin, businesses and items such as antiques and jewellery. It is charged on the difference between what you paid and what you sell for, minus certain costs.

The Tories cut the CGT annual exempt amount to just £3,000, while in the Budget Reeves hiked the tax charge to 18% for basic-rate taxpayers and 24% for higher-rate taxpayers, with immediate effect. There’s a slim chance she could raise CGT rates again next week.

It’s too late to sell assets such as property before April 5, but there’s still time to sell shares held outside of a tax-free ISA, making use of this year’s £3,000 annual exempt amount before it expires, said Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners. “This is known as a ‘Bed and ISA’ strategy, which involves selling a non-ISA investment and rebuying it within an ISA to keep future gains tax-free.”

In an ISA all future growth will be free of CGT, as will any dividends. Investors used to be able to take £2,000 of dividends from non-ISA shares each year before tax, but that’s now been slashed to just £500.

Good to know: Your partner has a £3,000 CGT annual exempt amount, too.

Don’t forget “interspousal transfers”. 

Married couples and civil partners have another weapon in their tax-saving armoury, known as “interspousal transfers”.

They can transfer savings and investments between each other without triggering a CGT or inheritance tax bill (cohabiting couples cannot).

This strategy can halve a potential CGT bill and double the £500 annual dividend allowance.

Alternatively, shifting non-ISA savings into the name of the lower-income partner can reduce any tax bill.

Good to know: Transferred assets become the legal property of the receiving partner, so only do this if your relationship is stable.