39 simple ways to pay less tax
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Income Tax & National Insurance
1. Use your annual Stocks and Shares ISA allowance - each tax year you can shelter cash and investments within an ISA to minimise your tax bill. For example in the 2013/14 tax year , the overall limit is £11,520, for a Stocks and Shares ISA (also called an Investment ISA) of which £5,760 can be put into in a cash ISA. By using a cash ISA you can receive your interest tax free, and you don't pay tax on the interest or dividends or Capital Gains Tax on profits on investments within a Stocks and Shares ISA.
2. Get savings account interest tax -free - normal savings account interest is automatically paid net of 20% income tax (most people don’t realise this). Your bank assumes that everyone is a basic rate or higher rate income tax payer so have therefore used up their income tax free personal allowance. But, a non-income tax payer still has an unused personal allowance so they can inform the bank or building society of this and receive interest tax-free! Simply complete an R85 form, available from the HMRC website, and give it to your savings account provider.
3. Put savings in a non-tax paying spouse's name - if your spouse is a non-income tax payer and you are an income tax payer it makes sense to hold any money on deposit in a bank account in his/her sole name and complete an R85 form as described above. Obviously, once the savings are in their name they have sole control of the money so make you don't fall out.
4. Check your tax code - if you receive an income via PAYE (pay as you earn) be it earned or from a pension then check your tax code. Your PAYE code determines how much tax you pay. It is down to you make sure you are on the right code otherwise you could be paying too much tax. Recent research suggested that as many as 1 in 3 could be on the wrong tax code. Here is how to check your tax code is correct. The real problems start to arise if you have more than one job. If you do then read my article Two jobs? Avoid this tax trap.
5. Make sure your spouse uses his/her ISA allowance otherwise he/she will lose it. There's nothing to stop you moving cash into his/her name so that they can fund it. So sheltering more of your money from the tax man.
6. Equalise income between you and your spouse - If your spouse pays lower or indeed no income tax move income producing assets (not just bank accounts – as mentioned above) into their name. The income will then form part of their tax assessment so reducing your tax bill. It will ensure that your spouse’s personal annual tax-free allowance is used and any tax due is charged at a lower rate.
7. Consider joining employer share schemes – these schemes will reduce your taxable income, in exchange for shares under the scheme rules, and you will only be liable to CGT when you decide to sell the shares. But there are even ways to mitigate this - read my article How can I avoid paying tax on my £70,000 of SAYE shares?
8. If you continue to work after the state retirement age make sure you stop paying National Insurance
9. Consider generating capital gains rather than income – particularly when looking at your investments. Currently the CGT rate is just 18% (for basic and non-tax payers) and 28% (for higher rate tax payers) compared to the equivalent income tax rates of up to 20% and up to 45% respectively.
10. If you are self employed make sure you claim tax relief on the cost of running any car used for business purposes - for more information click on the following HMRC link.
11. If you are employed consider going freelance – in this way you can control your earnings and claim tax deductions against income. High-income earners are quitting their jobs to become self-employed consultants, which allows them to set up businesses that pay the small companies rate of tax at 20% for turnover of less than £300,000.
12. Employ your spouse - Employing family members, such as a wife, is a simple way for business owners to save tax - in particular those business owners whose spouse has no other sources of income in their own right. However, you can’t just pretend that your spouse works for you, they must contribute to the business and the level of salary you pay must be commercially justifiable. As long as you can tick those boxes, plus you pay your spouse above the minimum wage, you can deduct their pay as an allowable expense from your business profits and they pay minimal tax on their income.
13. Claim expenses - If you are self employed make sure you are claiming all your tax deductible expenses.
14. Make pension contributions – these can reduce your tax bill while at the same time saving for your retirement. Pension contributions receive tax relief at your highest marginal income tax rate subject to an annual limit of the greater of 100% of your earnings or £40,000.
15. Make pension contributions on behalf of your spouse and children via stakeholder pensions – You can invest up to £3,600 a year into stakeholder pensions for each of them, even if your spouse and children do not earn anything. Since basic-rate tax relief is available, each contribution of £3,600 will cost a high earner only £2,880.
16, Consider tax incentivised investments such as Enterprise Investment Schemes (EIS’s) and Venture Capital Trusts (VCT’s). These offer generous tax breaks upon investment but are very high risk. Other investments you may consider are zero-dividend preference shares as they do not provide dividend income but instead roll up to an eventual capital gain, hopefully. But a word of warning, never make an investment for tax reason alone. I’ve personally seen people badly burnt by doing so. Read my post Money tip #26 – Never make an investment just for tax reasons.
Capital Gains Tax
17. Use your annual Capital Gains Tax (CGT) allowance - The really good news is that everyone gets an annual CGT allowance each tax year, currently £10,600 (for 2013/14 tax year) . This means that you can make capital gains of £10,600 without having to pay tax at all. For investor this is very attractive, again, particularly for high rate income tax
18. Transfer assets to your spouse (husband, wife, or civil partner) and use their CGT allowance - Transfers between spouses are not taxed, and you both get an annual CGT allowance. This means you can transfer enough of your assets to your husband or wife for him or her to sell to use up their own allowance. This effectively doubles the CGT allowance for married couples.
19. Bed-and-spousing - In the old days you could sell shares on which you’d made a gain to use up some of your CGT allowance, and then the very next day you’d buy back shares in the same company. This was called bed and breakfasting, but it is no longer possible. Under current legislation you can’t buy back the same shares you sold within 30 days if you want to crystalise a capital gain. However, your spouse can buy shares in the company you sold. So what you can do is you sell an investment to realise the capital gain – taking into account your annual allowance, of course – and then your partner repurchases the same assets in their own trading account. This way you keep the assets in the family, essentially keeping your investment portfolio intact, but you’ve defused the gain.
20 Bed-and-ISA-ing - This is the same idea as bed-and-spousing, but this time you re-buy within an ISA. Purchasing back the same assets in an ISA doesn’t violate the 30-day rule.
21. Remember to carry forward any past capital losses - If you make an overall capital loss in a tax year year, you should note it on your Self Assessment tax return. Importantly, capital losses which you have declared can be carried forward and used to reduce your capital gains in future tax years. So reducing your potential CGT bill.
22. Sell your second home tax free like an MP - When you sell your main home you typically do not have to have to pay CGT under what is known Private Residence Relief. What the MPs did was use the rules to their advantage to apply it to their second homes. It is not illegal and you can do it as I explain in my article - Sell your second home tax free just like an MP.
In my article 15 ways to cut your inheritance tax bill I explain how to slash your IHT bill. Below is an extract, so click through to the article for more detail:
23. Make a will - If you die without making a will you will be deemed to have died ‘intestate’ and your estate is distributed in accordance with the law of the land, which is unlikely to be how you would have wished. There are a number of other reasons to make a will such as it may be possible to reduce the amount of tax payable on the inheritance (IHT) if advice is taken in advance and a will is made. For more information read Make a Will - including the why & how.
24. Get Married - Any assets passed between spouses (including those under civil partnerships) are free from IHT. The other benefit of getting married is that IHT is not payable when an estate passes between a husband and wife, or from one civil partner to another. Even better, married couples or civil partners can transfer any unused element of their IHT-free allowance to their spouse when they die. That means that a married couple’s assets can reach £650,000 (i.e. 2 IHT-free allowances of £325,000) before any IHT is payable.
25. Minimise your potential estate - the smaller your estate the lower the potential IHT liability.
26. Pass on unwanted inheritance - it is possible to divert on an unwanted inheritance to someone else by applying for a 'deed of variation' which will mean the gift can go to another nominated person and not ever form part of the original beneficiaries estate. The variation has to happen within two years of the original donor’s death for it to be valid. But speak to your financial adviser and solicitor first.
27. Make use of your annual IHT exemption -. You can give away gifts worth up to £3,000 in each tax year and these gifts will be exempt from IHT when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires. This annual exemption is in addition to the other gift exemptions
28. Gift money when an intended beneficiary is getting married - Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it. Wedding gifts are exempt subject to certain limits.
29. Make small gifts - You can make small gifts up to the value of £250 to as many people as you like in any one tax year. However, you can’t give a larger sum and claim exemption for the first £250. You can’t use your small gifts allowance together with any other exemption when giving to the same person.
30. Give to political parties or charities – No IHT is payable on gifts to charities and political parties
31. Gift money out of regular income - You can gift away as much as you wish from your regular income as long as your standard of living is maintained. But beware as ‘income’ does not include that from investment bonds.
32. Simply give away your assets - directly giving away your assets is known as a potentially-exempt transfer (PET). These gifts will not be included in your estate, and so will be free of IHT, a long as you live for 7 years from the date of making the gift.
33. Consider investments that attract IHT relief - certain investments attract preferential IHT treatment, such as AIM-listed stocks (which can now be held in a Stocks and Shares ISA), forestry and woodlands. But seek advice as they are not for the feint hearted, especially AIM stocks which are very volatile investments.
34. Take out insurance – it is unlikely that you will mitigate an entire IHT liability in which case a simple solution is to take out life insurance.
35. Save money on your TV licence - and before you say anything yes it is a tax. Read my article How to save money on your TV licence.
36. Check you are in the right valuation band – your Council Tax bill is based on the value of your property. But when I say 'value' it is the value that your local council have assessed your property to be worth. When Council Tax was introduced in the early 90's properties were placed in 'valuation bands' which were established from nothing more than fleeting external glances of properties. Many properties have never been revalued subsequently. So you might not only be in the wrong valuation band and paying too much tax but you could even be paying more than your neighbours. Fortunately it is possible to challenge your band and potentially save thousands of pounds if you think your band is wrong. But be warned, get your assessment wrong and you could equally be in too low a band in which case an appeal might get your band revalued upwards, as well as those of your neighbours potentially.
37. Get a discount – certain groups of people (such as those listed below) don't pay Council Tax. So if you live with anyone falling into any of these groups you can claim a discount as the full Council Tax bill is based on at least two adults (who are not part of any exempt groups) living at your address. If only one adult lives in your home, ignoring those exempt people, your Council Tax bill can be reduced by 25 per cent. Exempt people include:
- children under 18
- people on apprentice schemes
- 18 and 19-year-olds who are in full-time education
- full-time college and university students. For houses that contain full-time students only, the bill will be reduced by 100 per cent.
- young people under 25 who receive funding from the Skills Funding Agency or Young People’s Learning Agency
- student nurses
- foreign language assistants registered with the British Council
- people who have a severe mental disability
- live-in carers who look after someone who isn't their partner, spouse or child (up to 18 years)
38. Apply for Council Tax Benefit – people on low income or receiving benefits may be able to apply for a Council Tax Reduction.
39. Seek advice from a financial adviser and a tax specialist – if you are contemplating mitigating income tax you should seek expert advice as not all the ideas above are suitable for everyone (they are for information purposes only). Also, remember that the tax regime is always subject to change so bear this in mind before you start making wholesale changes to your finances.
(image by renjith krishnan - freedigitalphotos.net)
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