Tax Freedom Day is the day in the year where, theoretically, you’re no longer working solely to pay your annual taxes and instead begin keeping your own money. These numbers are of course calculated by averages. Individually speaking, everyone will have a slightly different Tax Freedom Day of their own.

In 2022 Tax Freedom Day fell on 8 June, whereas in 2021 Tax Freedom Day fell a full week earlier, such is the heightened burden of taxation. It reminds us that any money you earn effectively goes straight into the Government’s coffers. Last year it took an average worker 159 days to start earning money for themselves. The Tax Freedom Day of 2022 was the latest on record, according to the Adam Smith Institute, thanks to a persistently increasing tax burden on households, and it is only predicted to fall even later in 2023. However, it is possible to bring your Tax Freedom Day forward.

Planning for tax efficiency

This especially matters if you’re facing taxes on more than just income. Taxation comes in many forms and can be a serious barrier to successful wealth growth.

Through an individual’s lifetime, taxation will take a cut of:

  • Property through stamp duty and council tax
  • Income through income tax (and National Insurance)
  • Expenditure through VAT
  • Profits on investments through capital gains tax
  • Profit on investment income through dividend tax
  • Passing on your estate to loved ones through inheritance tax (IHT)

There’s good news and bad news in this. Some of these taxes are essentially unavoidable. Income tax, council tax, VAT and stamp duty are effectively unavoidable unless you become a tax exile. Obviously with income tax there are ways to reduce the burden, but typically this comes from reliefs such as Marriage Allowance, which won’t apply to everyone and will only reduce the liability by a relatively small amount.

However, there are significant and effective ways to mitigate the effects of taxes on investments, long-term savings and other liquid investments. This comes primarily through the use of pensions and ISA allowances.

Pensions allow for the deferral of tax liability until you access your pension. Of course, there are implications when you do draw down, but the relief at source available makes this worth it to a large extent. Plus, the 25% tax free allowance and other ways to structure drawdown make pensions still very valuable. Add to that the recent abolition of the lifetime allowance and pensions are a viable method for mitigation still. Plus, pensions are currently largely exempt from inheritance tax, adding another feather to the cap of the vehicle’s tax efficiency. They can also be a good way of getting around the gifting allowance, as individuals are able to pay in to pensions for children or grandchildren from any age.

ISAs provide a reverse benefit to pensions for long-term tax liability mitigation. While you won’t get upfront relief for contributions, there are essentially no implications when it comes to using the money at the other end.

Finally, one of the most disliked and complicated taxes, inheritance tax (IHT), has a myriad of rules and allowances that allow for mitigation. However, what is essential to remember with IHT is these mitigations are best applied over time. This makes careful wealth management and planning critical. Coupled with well-structured growth through ISAs, pensions and other methods you could see your own personal Tax Freedom Day start to fall much earlier in the year.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2023.