Five ethical ways to cut your tax bill
In February, HSBC was rocked by allegations that it helped some of its wealthiest clients avoid tax. The story forced the issue to the top of the political agenda, with all major parties quickly making it clear that they are the ones who can be trusted to clamp down on businesses and wealthy individuals who dodge the taxman ahead of May's General Election.
As for the rest of us who aren't worth millions of pounds, is there any way we can cut down our tax bills ethically?
Moneywise takes a look at the ways you can ease your tax burden while keeping a clear conscience.
If you are taking the time to consider your tax commitments, then it is a good idea to make sure you are paying the correct amount of tax in the first place.
Check you are on the correct tax code by either calling HMRC or visiting its website (hmrc.gov.uk). You will need your current tax code, which is found on your payslip or your P60, along with details of your earnings and savings both before and after tax.
Also, check you are getting all the tax credits you are entitled to. The tax credits calculator, also on the HMRC website, will help you work out your household income and if you are eligible to claim both Child and Working Tax Credit.
The basic amount you can claim from Working Tax Credit is £1,940, though what you are entitled to depends on a wide range of factors including your family's circumstances and income. Contact the Tax Credit Helpline on 0345 300 3900 for help in finding out if you qualify.
Alternatively, if you'd rather not use a government website to look into the benefits situation, why not visit turn2us.org.uk or entitledto.co.uk.
1. ISAS AND JISAS
It's important to make your savings as tax-efficient as possible and using an Isa is the best - and most simple - way.
An Isa lets you squirrel away thousands of pounds each year and avoid paying tax on the interest you earn. From 6 April, you will be able to save a maximum of £15,240 during the new tax year (2015/16) without HMRC being able to take its cut.
Crucially, the allowance is reset at the beginning of each tax year so even if you've maxed out your allowance in the current year, you will again be able to put away the maximum amount in the next one.
Last year's Budget introduced major changes, with Chancellor George Osborne announcing that the new, simplified accounts (Nisas or 'New Isas') would allow people to hold the maximum annual amount in cash, stocks or shares, or a combination of the two. Previously, people had to split their savings between two separate accounts (the limits in the 2014-15 tax year began as £11,520 for stocks and shares and just £5,760 for cash before the New Isa regime came into being).
Andrew Hagger, founder of financial website moneycomms.co.uk, says Isas are a must-have for anyone wanting to save cash: "As a basic-rate taxpayer, you will keep that 20% on interest earned rather than it ending up in the taxman's coffers, while for higher-rate taxpayers, Isas are even more compelling with a 40% saving on the interest earned."
If you have a young family, then you will want to take a look at a Junior Isa (Jisa), which works in the exactly the same way as the adult equivalent (though there are still separate accounts for stocks and shares and cash).
Introduced in 2011 as a replacement for Child Trust Funds, the allowance for the new tax year is £4,080. Children cannot withdraw the money until they turn 18, so mums and dads can grow a healthy nest egg for them before they reach adulthood.
2. PENSION RELIEF
It is important to get your pension arrangements in order, as you can claim tax relief on private pension contributions worth up to 100% of your annual earnings.
However, with research from Prudential and Unbiased.co.uk revealing UK taxpayers are set to lose out on a whopping £2.9 billion in 2015, either by failing to claim back their relief from HMRC, or by not paying into a pension at all, many of us are missing out on a welcome tax boost.
If you are a basic-rate taxpayer and pay £8,000 into your pension, the government will top this up to £10,000, thanks to tax relief of 20%, while a higher- rate taxpayer gets relief at 40% and an additional- rate taxpayer at 45%.
Your workplace scheme (an occupational pension) will see your employer deduct your pension contributions from your salary before tax has been paid, so you get the full benefit of tax relief straightaway without having to take any action.
If you are paying into a personal pension, your contributions are paid from your own taxed income, so your pension provider will claim 20% relief on your behalf, while higher-rate taxpayers can also claim a further 20% back either via their tax return or in writing to HMRC.
And if you are over 55 and are planning on taking advantage of the new pension rules which come into force this month, remember the 25% tax-free lump sum applies to each withdrawal from your fund, not just the first one.
3. MARRIAGE TAX BREAKS
In February, the government opened registration for its new Marriage Allowance – a tax break for the UK's four million married couples and 15,000 civil partnerships that could see them save up to £212 a year.
The allowance means that a spouse or civil partner can transfer up to £1,060 from their personal allowance to their partner as long as neither of them pay more than the basic rate of income tax.
Some married people already have a tax break through the married couple's personal allowance. To qualify, you or your partner needs to be born before April 1935 and how much you receive depends on the income level of the claimant.
For the tax year 2015/16, the allowance is worth between £322 and £835.50 depending on your income and savings.
In a further boost for older married couples, retirees will be able to pass on annuity income tax-free if they die before 75 (currently where a joint annuity is held, the survivor's pension is taxed at their marginal rate). The changes will only apply where no payments have been made to the beneficiary before 6 April 2015.
And as a simple and common-sense step, Hagger suggests married couples and civil partners should consider moving their savings into the name of the person who pays less tax in order to lower their obligation.
"If a higher-rate tax-paying husband, for example, moves a proportion of his cash savings to his wife who pays basic-rate tax, there is immediately a 20% saving on the taxable interest," he says.
4. INHERITANCE TAX
Families can also take advantage of inheritance tax (IHT) incentives. Rules introduced in 2007 mean that married couples and civil partners can use each other's allowance without resorting to special planning with an independent financial adviser (IFA).
Everyone has a tax-free IHT allowance of £325,000, while anything above this – or the 'nil-rate band' as it is called – is taxed at flat rate of 40%. This might sound like a high threshold but when you consider four million homes in the UK are worth £300,000 or more, it's easy to see how the allowance is swiftly eaten into.
However, married couples and civil partners are allowed to transfer any unused nil-rate band when the first person dies. This means if you leave everything to your spouse on your death, they will have a £650,000 threshold for their estate to use before IHT kicks in.
Certain gifts are also exempt from IHT. All gifts of up to £250, gifts made between married couples and civil partners, and gifts up to £3,000 in total in any tax year are some of the more common examples where IHT doesn't apply. Other rules allow you to gift larger sums tax-free, as long as you live for seven years after the date of the gifting.
The government offers tax relief to all individuals giving donations to charities or community amateur sports clubs - though how this is worked out depends on the way in which you donate.
If you were to leave a gift to a favoured charity in your will, your donation will be either taken from the value of your estate before IHT is calculated or reduce your IHT rate if more than 10% of your estate is left to charity.
Gift Aid, one of the most common ways of giving, means the charity can claim an extra 25p for every pound you donate. It won't cost you anything extra and if you are a higher-rate taxpayer, you can claim the difference between the higher and basic rate on your donation.
This means that if you were to donate £100 as a higher-rate taxpayer, the charity of your choice would receive £125 in total via Gift Aid, while you can claim £25 back.
You don't have to pay capital gains tax on land, property or shares donated to charity and you can pay less income tax by deducting the value of your donation from your total taxable income when you complete your tax return.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
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.
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.
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.
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.
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.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.