Slash your tax bill in just five days
Tax might not be the most exciting of topics, but with billions of pounds paid in unnecessary tax every year, dedicating some of your attention to your tax affairs could make you considerably better off.
According to research by unbiased.co.uk, £9.3 billion is wasted on tax every year and some of this money could be yours. Getting your hands on your share is fairly straightforward too, with some small tweaks potentially shifting large amounts of money out of the taxman’s coffers and into yours. Set aside a few hours a day for a one week to improve your tax situation and you could be quids in.
Today’s the day to address the basics. First is your tax code. This is used to determine how much tax you pay, taking into account factors such as your personal allowance and any taxable benefits you receive.
“It’s worth checking, especially if you’re entitled to an age-related allowance or you’ve changed the taxable benefits you receive,” says Malcolm Cuthbert, managing director of financial planning at Killik & Co.
Your PAYE Coding Notice, which is sent out by the tax office in the first couple of months of the year, will explain how your tax code is made up. If this isn’t right, you need to contact your tax office, which will be able to make any amendments. Go to directgov.uk for details.
Next on the list is tax credits. Nine out of 10 families with children qualify for child tax credits; providing your household has an income of less than £58,000 (£66,000 if you have a child under one), you’ll be eligible. To make a claim, you need to contact HM Revenue & Customs on its tax credit helpline, 0845 300 3900, or online at hmrc.gov.uk/taxcredits.
Another seriously under-claimed tax credit is the pension credit. This guarantees a minimum weekly income of £130 for single people aged 60-plus or £198.45 for couples. Also, anyone aged 65-plus who has saved towards their retirement may be entitled to a credit of up to £20.40 a week or £27.03 for couples. Again, to find out if you are eligable, contact HM Revenue & Customs.
You should also make sure you’re not paying too much council tax. The full council tax bill assumes there are at least two adults living in a property; if you live alone, you are entitled to a 25% reduction.
You may also qualify for a discount if you share your home with another adult who isn’t your spouse or civil partner and is unable to pay council tax. People whose income and savings and investments are £16,000 or below are entitled to council tax benefit, although the size of the reduction will depend on your circumstances.
It’s also worth checking that your property is in the correct council tax band, because out-of-date property valuations mean thousands of houses are in the wrong band. If you can prove your property is in a higher band than it should be, you can reclaim overpayments, often backdated to 1993 when the council tax system was introduced.
It’s quite a fiddly process and there’s no guarantee the outcome will work in your favour, but if you believe there is an error, it’s worth the effort.
Go to voa.gov.uk/council_tax for more details.
Day two is all about your savings, and making sure you’re taking advantage of any tax breaks that are available.
First, consider where you’ve got your savings. “If you’ve got money on deposit, use your cash ISA allowance,” says Bob Perkins, technical manager at independent financial advisers Origen. “Rates can often be higher than on standard savings accounts and, with interest rates low, the tax savings can make a big difference.”
Anyone over the aged 50 or over in the current tax year (2009/10) can save £5,100 in a cash ISA, whereas younger savers can save £3,600. This allowance will increase to £5,100 to everyone over the age of 16 from April 2010.
Even if you’re a non-taxpayer, it’s worth using your ISA allowance as your tax position may change in the future.
Other tax-free savings products are available, with National Savings & Investments home to a number of them. These include index-linked savings certificates and fixed-interest savings certificates. “Returns aren’t always great,” says Perkins, “but you can get your interest tax-free, which may be beneficial, especially if you’re a higher-rate taxpayer.”
As well as your own tax position, that of your kids is also important. They have exactly the same personal allowance as an adult (£6,475 in 2009/10), but because most of them don’t earn anything, this rarely gets used up. Because of this, interest on savings accounts can be paid gross; form R85 from their savings provider will ensure this happens.
This only applies if they get their money from someone other than their parents. Where parents save on behalf of a child, the tax rules are different. Only £100 of interest (per parent) can be earned free of tax. Where interest from the parent’s gift exceeds this level, the whole lot will be taxed as the parent’s income.
This is to prevent parents from holding their own cash savings in their children’s names and taking advantage of the tax allowances. This £100 limit only applies to parents and step parents; grandparents and other adults who give money to children are not liable to pay the tax if the interest exceeds £100 a year.
For parents, this problem can be avoided by using a child trust fund (CTF), which is basically a tax-free savings vehicle, introduced for children born on 1 September 2002 or later.
Tony Anderson, marketing director at The Children’s Mutual, explains the tax benefits: “The CTF grows free of income or capital gains tax and, unlike other savings or investment accounts, it’s not subject to the £100 income limit for parents.”
CTFs were started by the government in 2005 to encourage parents to make long-term savings for their offspring. If you have a child born on or after 1 September 2002 you will receive a £250 voucher to start their account. You then receive another £250 voucher when the child turns seven – the vouchers are each worth £500 if you qualify for full tax credit on each occasion. Family and friends can top them up to a maximum of £1,200 a year.
Finally, if you have a partner, it’s also sensible to consider whether you could arrange your savings more efficiently. “If you pay different rates of income tax, move any savings into the name of the person paying the lower rate,” says Malcolm Cuthbert. “This will save you tax.”
By the middle of the week, you should turn your attention to making sure any investments or pensions you have are as tax-efficient as they can be.
First, stocks and shares ISAs. You can pay up to £7,200 into these each tax year, minus anything you put in your cash ISA. People aged 50 or old during the current tax year (2009/10) can save £10,200 in an ISA, minus up to £5,100 held in a cash ISA.
From April 2010, this larger ISA allowance will be offered to everyone over the age of 16, for cash ISAs, or 18 for stocks and shares ISAs.
As well as being capital gains tax free, they also have income tax advantages. “You can’t claim back the 10% tax credit on dividends, but if you have a bond or fixed-interest ISA, these are income tax free,” says Bob Perkins, adding that the current market conditions are also producing some good levels of income on bonds.
For longer-term planning, pensions are another tax-efficient option. You can pay in up to 100% of your annual earnings, provided this is less than the annual allowance (£245,000 for 2009/10), with HM Revenue & Customs giving you tax relief on your contributions. For basic-rate taxpayers, this is 20%, while for higher-rate taxpayers it’s 40%.
It doesn’t even have to be your own pension, as Cuthbert explains: “Anyone, including children, can have £3,600 a year paid into a pension, regardless of income. As this includes tax relief, this means you only need to pay in £2,880 to get the full £3,600.”
There are ways to bump up your own pension too. “Salary sacrifice allows you to replace part of your pay package that’s liable to national insurance and tax with something that isn’t,” explains John Chaplin, director in employment taxes at KPMG. “This could be childcare vouchers, bikes or, more commonly, pension contributions.”
Because of the savings on national insurance and tax, you effectively bump up the value of your contribution by about 31% (20% for basic-rate taxpayers plus 11% national insurance contributions). “If you exchange a 5% contribution with a 5% reduction in pay, you’ll get roughly 6.5% of your full salary paid into the scheme,” Chaplin adds.
There are potential catches to watch out for, however. A reduction in salary could affect any pay-related benefits such as maternity pay, redundancy or overtime, although most employers will use a notional pay, which would be the full amount, to ensure you’re not disadvantaged.
Another potential catch is not reclaiming the additional tax relief if you’re a higher-rate taxpayer. You’ll automatically receive it if you make contributions through an employer scheme, but if it’s your own personal pension, you’ll need to complete a self-assessment form to get the additional 20% relief.
The fourth day is about looking ahead with inheritance tax planning. Unbiased.co.uk’s research found that this is the area where most tax is wasted, with about £1.9 billion of IHT paid unnecessarily last year.
Falling property prices and the ability to transfer a nil rate band between spouses or civil partners has made IHT less of an issue, but it’s prudent to address this area of planning as the tax is pretty punitive. In 2008/09, IHT at 40% would be charged on anything over a nil rate band of £325,000.
“Use your annual IHT exemptions as these can help manage any liability you might have,” advises Perkins. There are plenty of exemptions available. For starters, you can give someone up to £3,000 a year and it’s exempt, plus you can use last year’s allowance if you haven’t already. On top of this, you can give as many people as you like up to £250 a year and it’s instantly out of your estate.
Wedding and civil partnership gifts may also be exempt – parents can each give cash or gifts worth £5,000, other relatives can give up to £2,500 each, and anyone else can give up to £1,000.
You can also give away your income, although you do need to be careful, as Perkins explains: “If you make regular gifts out of your income, and by doing so it doesn’t affect your standard of living, then these will be outside your estate. You also need to document this.”
However, for any gifts to be excluded from IHT, you need to live for seven years after making the gift.
The transferable nil-rate band allows any unused nil-rate band from the first death to be used on the second death.
Or you could consider nil-rate band planning to shift assets out of your estate. This enables assets worth up to the nil-rate band at the time of death to go to beneficiaries without popping up in the surviving spouse’s estate. And, by putting them in trust, transfer to the beneficiary doesn’t have to happen until after the second death.
Another area where you could save tax is your life assurance. By writing it in trust, the proceeds are outside your estate for IHT purposes when you die.
You may also be able to reduce the tax paid on an estate you’ve already inherited. Matt Coward, personal tax director at PKF accountants, explains: “Falling asset values could mean that the estates of individuals who have died in the last couple of years have paid too much IHT. Administrators of estates should investigate if claims for current values can be used and refunds of tax claimed.”
This could be the case if IHT has been paid on the probate value of a house or land which was subsequently sold for a lower amount within three years of death. Similarly, if IHT has been paid on stocks and shares that are then sold at a lower value, you may be able to claim a tax reduction. IHT planning is often complicated so it’s best to seek professional advice from an IFA, trust specialist or solicitor.
Capital gains may seem unlikely in the current climate but, with indexation allowance scrapped in April 2008, you could find yourself being charged 18% capital gains tax on anything you make in excess of £9,600 (2009/10).
“How long you had held an asset used to be important, but now it’s a straightforward case of comparing the price when you bought and sold,” says Stephen Herring, senior tax partner at BDO Stoy Hayward. “This works in favour of some people who might have had to pay tax at 40%, but if you’ve held assets for many years you could now get a tax bill.”
Because of this, it’s essential that you keep an eye on any gains you make. David Marlow, director at Alexander Forbes Financial Services, explains: “You can make a gain of £9,600, so you might want to take some of this to reduce a future bill. Taken across two tax years, and by using your spouse’s allowance too, you could remove close to £40,000 from a gain.”
Perversely, you could also take advantage of the fall in the stockmarket. Coward explains: “Many people have stockmarket investments that are now standing at a paper loss. It may be possible to crystallise these losses by a sale, followed by a repurchase by the spouse or within an ISA or trust. The losses will then be valuable when the stockmarket eventually recovers [because they can be offset against future gains].”
Some investments are also efficient from a CGT perspective. As well as ISAs, you might want to consider a venture capital trust (VCT) or an enterprise investment scheme (EIS). Both offer a number of tax breaks including tax-free capital gains, although with the EIS you have to wait three years before this applies.
However, Herring recommends caution with VCTs and EISs. “These aren’t slam-dunk tax schemes. They’re high-risk investments, and although you might save the CGT, you might lose a lot more if they don’t perform well.”
The process of applying for the right to deal with a deceased person’s estate. If a person has left a will, they will usually have appointed a will executor. The executor then has to apply for a ‘grant of probate’ from the probate registry, which is a legal document that confirms the executor has the authority to deal with the affairs of the deceased. If a person dies without making a will, intestacy law applies (see intestate).
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
Venture Capital Trusts were introduced in 1995 to encourage private investments in the small-company sector by offering tax relief in return for a minimum investment commitment of five years. A VCT is a company, run by a fund manager, which invests in other companies with assets of no more than £7m that are unlisted (not quoted on a recognised stock exchange) but may be listed on the Alternative Investment Market (AIM) or plus with the aim of growing the companies and selling them or launching them on the stock market. Investors in new VCTs are offered desirable tax advantages and VCTs themselves are listed on the London Stock Exchange, with strict limits laid down by HM Revenue and Customs on what they can invest in and how much they can invest.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Enterprise Investment Scheme
A scheme set up to encourage investment into small, unquoted trading companies and give investors tax breaks to compensate for taking risk. Because the companies in the scheme are not listed on a stock exchange they often carry a high risk, so the tax relief is intended to offer some compensation. An EIS company cannot be a subsidiary, must trade wholly in the UK, can’t employ more than 50 people and certain activities (including forestry, farming and hotels) preclude companies from offering EIS relief.
A special government scheme operated through employers that allows you to pay for childcare from your PRE-tax salary. The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled) and can be used at any registered and regulated nursery, playgroup and for nannies, childminders or au pairs.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.