Four easy ways to pay less tax
Check your tax codes
The first step in reducing your tax bill is to make sure your tax code is correct, as this determines how you're taxed.
HM Revenue & Customs does make mistakes, especially with age allowances for people aged 65 and above, so if you're not convinced yours tallies with your situation, contact your tax office.
Another code that often goes awry is your council tax band. These were set back in 1991, with the property valuations carried out super speedily.
If you think your property is in too high a band, contact the Valuation Office Agency; you can check your band on its website voa.gov.uk or the Scottish Assessors Association website-saa.gov.uk for Scottish residents.
As well as checking your codes, Bob Perkins, technical manager at independent financial advisers Origen, says check your affairs are arranged as tax-efficiently as possible.
"Look at all your savings and investments. Have you used your ISA allowance? Might you be better off moving into assets producing growth rather than income?
"If you're married and your spouse is in a lower tax band, put them in their name to reduce tax," he says.
Your pension planning can also deliver considerable tax Savings. You'll receive tax relief on your contributions, so for every £80 you pay into a pension scheme, the taxman will give you a further £20.
And, although the regulations are tightening up for high earners, if you're a higher-rate taxpayer earning less than £130,000, at present you can claim a further 20% tax relief through your tax return.
The pension rules also allow you to pay into a pension if you're not earning. "If your husband or wife isn't earning you can pay in up to £2,880 into their pension and this will be topped up with tax relief to £3,600," says Perkins.
For more on reducing your tax bill read: Cut your tax bill in one day
You might also want to consider some forward planning by thinking about inheritance tax. Under the current rules, which may be liable to change under the Conservative-Liberal coalition government, you can leave up to £325,000 inheritance tax free, with anything above this taxed at 40%.
"It could potentially be a big bill but if you regularly review your situation and take advantage of planning tools such as the inheritance tax exemptions, you can reduce a future bill," says Perkins.
Remember that spouse's can carry over their partner's inheritance tax limit and you can gift away up to £3,000 tax-free and make as many small gifts of £250 without paying any tax.
Tax-efficient products not to be missed
ISAs – Allow you to invest up to £10,200 this tax year, with up to £5,100 in cash and the balance in stocks and shares. Interest is tax-free and, on stocks and shares ISAs, there's no capital gains tax or any further income tax on the dividends.
Read: The best cash ISA rates
Tax exempt savings bonds – Offered by friendly societies, these allow you to save up to £25 a month or £270 annually in stocks and shares. Provided you hold the bond for at least 10 years, you'll receive a tax-free lump sum at maturity.
Pension – as well as tax relief on any contributions you make, you can also take up to 25% of your pension pot as a tax-free lump sum when you retire.
Salary sacrifice – by redirecting, or sacrificing, some of your salary you can benefit from tax and national insurance savings on employee benefits such as pensions, cycle to work schemes and childcare vouchers.
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 catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
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.
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.
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.
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.
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.
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.
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.