12 ways to cut your income tax bill
Here are 12 way to slash your income tax bill:
- Utilise your ISA allowance (and that of your spouse) – Individual Savings Accounts (ISAs) allow you to save/invest free of income and capital gains tax. By sheltering income producing investments or savings inside an ISA wrapper will help reduce your income tax bill.
- Consider generating capital gains rather than income – particularly when looking at your investments. Currently the Capital Gains Tax (CGT) rate is just 18% for basic rate payers compared to a 20% income tax rate. For higher rate income tax rate payers their CGT rate is 28% compared to an income tax rate of 40% or 50%.
- Then utilise your annual Capital Gains Tax (CGT) allowance (and that of your spouse) – If you are taking withdrawals from your investments make sure you use your CGT alowances as it could provide you with £21,200 tax free each tax year.
- Equalise income between you and your spouse - If your spouse pays lower or indeed no income tax move income producing assets (including bank accounts) 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.
- If you are self employed control your income and put your profits back into the business– In the long run you may benefit as an eventual sale of your business will be taxed as a capital gain. Genuinely trading companies can also claim entrepreneurs’ relief which is taxed at 10%.
- 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, you must be able to demonstrate that they a) contribute to the business and b) are not paid more than a third party you could have employed instead. For more information read my article Money tip #101 – Employ your spouse and save tax.
- Become a company - you could make yourself a private company and pay yourself an income below the level for income tax or NI contributions. In addition you could pay yourself a dividend from the company you have created. There will, however be tax to be paid by your company on these dividends at the rate of 20% if they are below £300,000. Creating a company is not really a possibility for employees as there are anti-avoidance rules to negotiate but it is a definite option for self-employed, freelancers or consultants.
- Consider taking part in 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. (the diretgov website offers further info – click here).
- Consider salary sacrifice – if your employer runs a salary sacrifice scheme it is possible to forgo part of your salary in exchange for a non-cash benefit such as childcare vouchers, pension contributions or extra holiday. By sacrificing your salary in this was it may be possible to reduce your taxable income.
- Make pension contributions – these can reduce your tax bill while at the same time saving for your retirement.
- 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.
- 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. However National Saving & Investment Certificates offer tax-free returns and are among the safest investments out there. These are often over looked by investors but they can also offer a way of protecting your savings against the threat of inflation. (see my post Money tip #30 – One way to protect your savings from inflation, both tax and risk free).
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