How to pay less tax: families
With the country in the grip of austerity measures, you can be sure that most of us will see our tax bill rise in April. But, while some of us it's unavoidable, there are steps you can take to ensure you don't hand over more than you need to.
Simply refusing to pay tax isn't possible without breaking the law, but figures from professional advice website unbiased.co.uk show we're wasting billions of pounds in unnecessary tax.
The average UK taxpayer wastes an estimated £186 a year in unnecessary tax payments.
Case study: a family with kids
Andy and Jessica Morris have two kids, Wilson, four, and Amber, two. Jessica is a full-time mum, while Andy works for an engineering firm, earning £50,000 a year. In the 2011/12 tax year, this meant Andy recieved an income tax bill of £9,930.
This year, as a result of the changes in the personal allowance and tax brands, Andy will pay £10,010. On top of this, he's subject to a higher national insurance bill - rising from £4,259.60 to £4,381.04. This will mean the family will be £201.44 worse off.
Andy and Jessica's solution
Mike Warburton, director at Grant Thornton, recommends they take advantage of the differences in their tax positions and arrange everything more efficiently. "Jessica isn't a taxpayer, so they should put as much of their savings as possible into her name to reduce the tax," he explains.
This would be a good move. They inherited £50,000 from Andy's grandmother earlier in the year, and although they intend to move it gradually into ISAs, it's currently sitting in a deposit account earning a paltry 2% in interest.
In Andy's name, this would equate to an annual interest payment of £600, while in Jessica's name it would be £1,000.
Warburton also suggests starting a pension for Jessica and also for the two children. "Even without an income you can put £3,600 a year into a stakeholder pension, and because of the tax relief, you only need to pay in £2,880," he says.
For the adults, this will spread the pensions between Andy and Jessica, potentially enabling them to use both of their income tax allowances in retirement rather than just Andy's.
For the kids, although it won't be available until they reach at least 55, compounding the tax-free growth over the years could potentially make it a valuable pension pot.
Brian Lawless, tax and trust consultant at Jelf Financial Planning, also recommends that Andy considers salary sacrifice - taking a lower salary and receiving extra pension contributions instead.
"This would save him both tax and national insurance on the salary he sacrifices. Additionally, the employer saves on NI and some, or all, of these savings could go to Andy," Lawless explains.
"But of course he needs to weigh up whether he can afford to give up the salary."
If he did, however, the savings are powerful. In the past Andy has received a bonus of £10,000 when the firm won a large contract. Taken as income this would be worth £5,800 after tax and NI. "By diverting this to his pension, and providing his employer passes on its NI saving, it would be worth £11,380," Lawless adds.
Getting the basics right
While complex planning can save you thousands in tax, it's also worth paying attention to the basics such as your tax code and tax credits. This guide will help you get the basics right.
- Check your tax code by looking at your pay slip or asking your tax office for a coding notice. This will detail your allowances and any deductions due to state benefits or taxable employee benefits.
If it doesn't look right, query it - any errors will affect how much you pay or potentially result in a large tax demand if you're paying too little. Given the size of most of our tax bills, it's probably no surprise that some of us pay too much. This can happen if you change jobs and your correct tax code isn't used, or if you have more than one job.
If the overpayment relates to the current tax year, contact your tax office as it'll be able to adjust your tax code. If an overpayment relates to a previous year, write to your tax office with your P60 and details of your income.
You can claim back overpaid tax for up to four years.
- You can also pay too much tax on your savings, as tax on interest is deducted at source. If this has happened, complete a form R40 Tax Repayment Form for each year you've paid too much. A form R85 from your building society or bank will stop future interest being taxed.
- Another basic that can affect your overall financial position is tax credits. Nine out of 10 families with children are entitled to tax credits and any pensioner receiving less than £137.35 a week (£209.70 for couples) can get pension credit.
A benefit-checker such as that provided by Turn2us can help you claim your entitlement (turn2us.org.uk).
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.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
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.
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.
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.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.
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.
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.