Seven tax-saving tips to use in 2013

1. Making gifts to charity

If you make a Gift Aid declaration when you donate to a registered charity, the charity will receive additional income from the government.

For example, if you pay £100 to a charity, the Gift Aid declaration will trigger a £25 contribution from the government.

Higher-rate taxpayers should make sure to claim the payment on their tax returns, as higher-rate relief is also available. Taxpayers paying tax at the 40% rate can reduce their tax bill by a further quarter of the gift, so they can reduce their tax bill by £25, making the net cost of the gift £75.

It's also possible to elect for a payment to be treated as if it had been made in the previous tax year. If, say, you were a higher-rate taxpayer last year but not this year, it would be advantageous to have a donation treated as if it had been paid in the previous year.

If you bear tax at a marginal rate of 50% or your taxable income is between £100,000 and £112,950 – which is the income band taxed at the even higher rate of 60%, due to the gradual removal of the personal allowance in this band – the tax saved is even greater.

At the 50% rate, your tax bill would reduce by £37.50. If your marginal tax rate is 60%, you would save £50 in tax. As you can see, this can halve the final cost of a gift compared with the cost for a basic-rate taxpayer.

2. Transferring assets to student children

Gifts of income-producing assets to your children are ineffective for income tax purposes, unless their total annual income is below £100. However, once they reach the age of 18, this rule ceases to apply.

So if you want to support your student children, rather than give them a monthly allowance that is paid out of your taxed income, you could give them assets, the income from which would be taxed at a rate applicable to them.

Assuming they have no other income, the first £8,105 of income is covered by their personal allowance, so no tax would be payable. The next £2,440 is taxed at 10% for savings income. The rest, up to £37,400, is taxed at 20%, at which point the 40% higher rate of tax kicks in.

Higher-rate taxpayers can save a lot of tax if they pass on income taxed at 50%, or even 60%, in their hands to their adult children, who will be taxed at nil or perhaps 10 or 20% on the same income.

Don't forget that if a child's income falls within their personal allowance, they can fill in form R85 so that they receive savings interest gross. If they don't do this, interest will be taxed at source at a rate of 20% and they will have to apply to the tax office to recover the tax.

3. Tax instalments may be excessive

Under self-assessment, the default position is that instalments payable in January and July are based on the previous year's tax bill. This is fine when income is rising, as there should be a final payment to make up the difference when your tax return is filed.

However, where income is falling, which may be a common situation this year, people tend to end up overpaying their tax through their instalments. You can request that your instalments are reduced by completing form SA303.

You need to make a realistic estimate of the eventual tax bill, because if you overstate the reduction in payments you need and underpay your final tax bill, the tax office will charge interest.

4. Wrong tax codes

HMRC has been criticised for incorrect tax coding notices. These affect the level of tax deductions from your salary. If you believe your coding notice is wrong, you should contact your tax office and explain the error.

Often, the codings are based on the previous year. So if you had untaxed income, such as rental income or income that is partially taxed at source, but you are a higher-rate taxpayer, for example, HMRC will often try to collect as much as possible of the additional tax via your tax code.

However, if your income from such sources has fallen, you should let HMRC know so that the code can be corrected.

Get to know your tax code

5. Personal trading losses

If freelancers and other self-employed individuals make a loss, they can set the loss against other income in the same year of the loss or carry it back to the previous year. For example, if you make a loss in the 2012/13 tax year, you could offset that loss against other income in 2011/12 or 2011/10.

In addition, where losses arise in the first four years of a business's life, these losses can be carried back up to three tax years.

What about rental losses? Many landlords will have come to the end of attractive two-year mortgage deals and found it hard to remortgage, and they may now be stuck with much more expensive loans.

This could turn a profitable rental business into a loss-making one. Unlike trading losses, rental losses cannot be set against other income; they can only be carried forward, indefinitely, and set against future rental profits.

6. New tax penalty regime

Over the past couple of years, HMRC has introduced changes to how it polices the tax system.

These changes have increased the powers of investigation and scrutiny available to HMRC, and arguably increased the penalties that can be imposed on taxpayers, while reducing the discretion of HMRC to reduce penalties for cooperation and voluntary disclosure.

Penalties are now determined by:

  • the amount of tax involved
  • the nature of the behaviour resulting in the tax loss, and
  • the extent of disclosure by the individual and whether it is prompted or unprompted.

On the plus side, penalties may be suspended to give individuals an opportunity to put their house in order, a welcome departure from the past.

No penalty will arise in the case of innocent mistakes, although it can be difficult to draw a line between innocent errors and deliberate evasions.

Where the individual has failed to take reasonable care, a penalty of up to 30% of the tax due will be levied. A penalty of up to 70% will be imposed for deliberate understatement. If there is concealment, the penalty will be 100%.

The level of disclosure will affect the level of penalty. For an unprompted disclosure of a failure to take reasonable care, the tax inspector could reduce the penalty from 30% to nil.

If a taxpayer is initially challenged by an inspector and then fully discloses, each penalty could be reduced by up to half. The level of disclosure, whether prompted or not, will also have a big impact on the size of the penalty.

7. Failure to notify

Where an individual fails to notify HMRC of a taxable activity – if someone were to let out their home, having moved house and not sold the previous home, or start a business without notifying HMRC, for example – there is no penalty if there is no loss of tax – because no profit was made.

Under the previous system, an automatic fine of £100 was imposed if you failed to notify HMRC of the start of a business activity within three months.

Nevertheless, individuals are still required to notify HMRC of a new self-employment for Class 2 National Insurance contributions. The £100 fine now only applies where there is a loss of tax.

There is also no penalty if you have a reasonable excuse for failing to notify. So in some respects, there is a softening of approach.

This article was written for our sister publication Money Observer

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