Reduce your tax bill
Paying tax is a fact of life but there are plenty of ways you can reduce your tax bill with a minimum amount of effort on your part. Here are five simple ways to cut your tax bill.
1. First off, check your tax code on HM Revenue and Custom’s website. Your income tax allowance is reduced by any employer benefits – such as a company car or health insurance – so if your circumstances have changed then you could be paying over the odds.
2. Use your ISA allowance. Unlike traditional saving or investment accounts, money in an ISA will grow free of further income or capital gains tax. Until 6 April, anyone over the age of 18 can invest up to £7,000 in ISAs - either £3,000 in cash and £4,000 in stocks and shares or the full £7,000 in stocks and shares. And from 6 April, you will have an increased tax-free allowance of £7,200 to use.
3. Give to charity in a tax-efficient way. Dropping the odd quid into a charity collection box is very commendable – but with a little bit of effort every pound you donate could go a lot further for the charity in question. For example, Gift Aid means the government treats the money as if the donor had already deducted basic rate tax from them. The charity can then reclaim this tax to increase the value of a donation. Find out other ways to give to charity without giving to the taxman.
4. The taxman will take 40% of your estate above £300,000 (rising to £312,000 from 6 April) when you die. One way to avoid inheritance tax is to give your money away before you die, although there are rules restricting this practice. It is best to seek professional advice from an estate planner to prevent the inheritance you intend to leave your loved ones going straight into the pockets of the Treasury.
5. Finally, saving in a pension is the most tax-efficient way to plan for retirement because the government offers tax-relief on contributions. For example, every pound a basic rate taxpayer puts into their pension pot can be claimed back at 22% (falling to 20% 2008/09). So if you don't save for retirement then you are missing out on this tax-break.
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.
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.
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.
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.
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.
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.