Underused tax breaks can help fight the cost-of-living crisis

Wednesday’s inflation figure for July is expected to reveal even higher price rises last month, while the Bank of England is now forecasting high inflation well into 2023. The forthcoming energy price cap increase is now predicted to mean average energy bills rising to around £5,000 a year.

It means households across the UK are fighting dramatic cost increases, which threaten their standard of living. But many could be taking advantage of key tax breaks and incentives, including tax-free childcare, the marriage allowance, pension credit and more.

Underused tax perks are available to both working and retired households, including low-income and middle-income individuals and couples.

AJ Bell Head of Personal Finance, Laura Suter, says:

“The tax system has become more and more complex over the years, making it a herculean task for people to navigate and be aware of the tax breaks and allowances they are entitled to. It means many are missing out on thousands of pounds of extra income or support each year – which at the moment could be the difference between surviving price rises and going into debt.

“The current government is focused on making more changes to the tax system and unveiling new schemes to help households, but if they put a similar effort into publicising the existing tax breaks and additional support available to people a lot of households would be far better off – and more able to navigate the current cost of living crunch.”

Tax free childcare

“Figures show that during the 2021-22 financial year, 512,415 families used tax free childcare accounts in order to get up to £2,000 per child, per year off their childcare costs. However, while the Government is heralding this as a success, there are still almost 800,000 families who are eligible for the scheme but aren’t using the Government handout, meaning the perk is grossly underused.

The average family in the UK has 1.9 children, which means there could be £3bn per year of free Government money going unclaimed by families*. Considering the UK has some of the highest childcare costs in the world and most families are seeing these costs rise in the current cost of living crunch, this additional money would go a long way to keeping some families afloat.”

Marriage allowance

“This can be used by married couples where one partner is not earning or works part-time and receives a salary below the personal allowance of £12,570 and the other is a basic-rate taxpayer. If your household has one main breadwinner, often because the other partner is looking after children, then this could be worth £252 a year. However, the allowance is far more lucrative than that because claims can be backdated, meaning some couples could be in line for a £1,242 windfall.

“You have to actively claim the marriage allowance, rather than being automatically given it by the Government, meaning many people overlook it because they don’t know it exists or aren’t sure how to claim it.

“The tax break works by allowing a lower-earning partner to transfer up to £1,260 of their own personal allowance to their higher earning spouse. The higher earner will therefore pay less tax, boosting total household income.

“For most eligible couples it is worth an extra £252 a year, although this will be slightly less if the lower earner is on a salary close to the personal allowance threshold and cannot, therefore, transfer the full £1,260 of their personal allowance. But couples can also put in a claim for up to four previous tax years, if they were eligible, boosting to the total value of the tax break.

“The higher earner must be a 20% taxpayer, so those with earnings over £50,270 won’t be eligible.”

AJ Bell Head of Retirement Policy, Tom Selby, says:

Pension Credit

“An estimated 850,000 thousand eligible claimants fail to take-up their Pension Credit payments, which are available to individuals with less than £182.50 a week income and couples with less than £278.70. In total they’re believed to miss out on £1.7 billion a year**.

“The full basic State pension currently pays £141.85 per week. It means Pension Credit pays an extra £40.75 a week, or £2,119 a year, for someone with only the basic full state pension as a source of income today. It is also available to couples with income below £278.70, although this means two people on the full basic state pension are over the income threshold for Pension Credit.

“Some people will be entitled to higher Pension Credit payments, for example if they also receive Carer’s Allowance or support relating to disability.”

Cost of living payments

“Pension Credit also unlocks other support available to retired people with lower incomes, including the government’s new £650 cost of living support payments. These payments are available to those in receipt of a range of existing support payments, including Pension Credit.

“Someone on the basic state pension alone should be claiming an additional £2,119 in Pension Credit and £650 in cost of living support, totalling £2,849 per year. That could be enough to guard against the frightening energy bill increases coming their way this winter.

“To get the first Cost of Living Payment of £326, you must have received, or later receive, Pension Tax Credit (or another relevant tax credit) between April 2022 to 25 May 2022. This means if someone applied for Pension Credit now, with their claim backdated three months, they could still be eligible. But they only have a very short window of time left in which to do so.”

Pension tax perk

“Anyone under the age of 75 can still contribute up to £3,600 each year to their pot, even if they are retired and no longer have earnings from employment.

“Savers are entitled to claim 20% tax relief when paying into a pension like a SIPP (self invested personal pension). Tax relief of 20% is automatically added to their contribution by the pension provider.

“It means that by contributing £2,880 a retiree could claim a £720 perk in the form of tax relief, taking the total amount to £3,600.

“That money can then be withdrawn, with up to 25% paid out as tax-free cash and the remainder taxed at their marginal rate.

“For an individual paying basic rate tax it means they are left with £3,060, an extra £180 more than they had initially. Someone below the 20% tax threshold could be left with a bigger uplift.”

*Tax-free childcare explained: Families can claim up to £2,000 a year per child towards childcare costs, split into £500 per quarter. For every £8 you pay into the account the Government will add £2. Parents must be working and earning the minimum wage for 16 hours a week or more, but earning less than £100,000 per parent. More details here: https://www.gov.uk/tax-free-childcare

** https://www.gov.uk/government/news/eligible-pensioners-urged-to-claim-pension-credit-to-help-with-cost-of-living

These articles are for information purposes only and are not a personal recommendation or advice.