How to pay less tax: the basic-rate taxpayer
Feature
by Sam Barrett
With the country in the grip of austerity measures, most of us are expecting our tax bills to rise. But, while some of 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.
This includes £328 million in income tax; £552 million in capital gains tax; almost £2 billion in inheritance tax (IHT); and £3.9 billion in unclaimed child and pension credits.
The average UK taxpayer wastes an estimated £186 a year in unnecessary tax payments.
Case study: a single, basic-rate taxpayer
Sarah Hardy is 32 and works as a secretary in a local accountancy firm. Her salary is £24,000 and she's keen to start saving to get on the property ladder. The increases in the personal allowance announced in the 2011 and 2012 Budgets will make saving for that mortgage deposit a little easier.
In 2011/12, she took home £1,540.35 a month, but she'll get £1,556.86 a month from April.
Sarah's solution
"It's worth using a cash individual savings account for any savings," says Jock Cassidy, managing director at Ashley Law.
"Interest received on cash ISAs is tax-free, and although rates aren't great at the moment, when they rise Sarah will be glad she made use of this tax-free allowance."
See the latest best cash ISA rates
In 2012/13, she can pay a maximum of £5,640 into a cash ISA. At the time of writing, the best variable rate was the AA Postal Access ISA which pays 3.5% AER
Although Sarah's priority is to buy her first home, Cassidy says it might also be worth starting a pension. This is a big winner on the tax front as she'll get tax relief at 20% on any contributions. In practice this means it will only cost Sarah £80 to invest £100.
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.
A benefit-checker such as that provided by Turn2us can help you claim your entitlement (turn2us.org.uk).
Interesting question. I am even worse, being 65 in September 2011. I have yet to receive a coding notice or my first payslip. Am I entitled to the allowance from 1st April? It will, obviously, make a difference and bring some much needed relief.
I rang the tax office. It seems that you are entitled to the allowance for the elvant eyar from April BUT it comes in from the date of your birthday. For example I am 65 in September so I should receive a form some six weeks before asking for details of my income so they can work out how much of the allowance I will be able to have. Remember the state pension is not taxed at source so that needs to be taken into account. The allowance is then calculated for the whole of the relevant year and applied accordingly.
I will also be 65 this tax year (Nov), I spoke with the Tax Office and was told to call my Tax Office 3 months before my birthday to obtain the necessary forms to have my Tax Code adjusted to reflect my age.
great for explaining how much does UK Plc take from one's earning,
not so great in explaining HOW to look for tax inconsistencies (savings, two jobs, self employed...), instead stating the obvious...
You have to keep pressing your tax office. When I finally persuaded them that I was really going to be 65 that tax year and change my coding another tax office kept overriding them and cancelling it. I received twelve different tax coding notices that year! It all works out right in the end, you just have to keep fighting.
I am 60 this year, I am unemployed (not retired) this year, my wife is 63 this year with a part pension. So how can I save money and pay any less tax?
As I will be 65 in July I contacted tax office & have received new tax code for higher amount.You only get this higher allowance if your income is less then £24000.00.
I had an explanation from the tax people! HMRC generally don't give the extra allowance because they say that in the case of someone going onto state penson at 65 (men) theres a good possibility that they will owe tax at the end of the year they are 65. This will be worse if the allownace is given before their birthday. The way the maths works, it seems.
How do I know if we have been paying the right tax code
on a company car ?
We just go with it
.....not paying tax is against the law you say?
What you ment to say was not paying tax is illegal.
Lawfully not paying tax is lawfull.
Replying to BOYCE.....The extra £1000 on allowances is not the same as an extra £1000 tax-free in your pay packet (split over 52 wks). The extra allowance means that the tax man won't take so much tax: He will leave you an extra 20% of £1000 in your pay packet = £200 extra. When split over 52 weeks, this is roughly £4-5 extra a week. Hope this helps (even if it is disappointing!!)
Maybe, but it is useful to have a breakdown as it might be possible to gain by shifting income from savings to a spouse.
Read your notice of coding. My wife (who is 65) received her notice with only the allowance for the under 65-s. The 'small print' explained this by stating that they assumed her annual income would be over £27000 or something like that. Her previous tax returns showed her income to be around £7000 per annum. If we had not checked the code she would be paying tax this year, when she actually owes them nothing.
You will not pay tax as you are not employed. If you wife is working she can claim her tax back if she is under her tax allowance- going up to over £8,000 next tax year (from April)