How to pay less tax: the basic-rate taxpayer
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.
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.
"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."
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).
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.
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.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.