Trim your tax bill in one week

Published by Sam Barrett on 02 April 2013.
Last updated on 23 March 2015

Tax squeeze

Over a lifetime, you'll pay an eyewatering £656,000 in tax on average, according to the TaxPayers' Alliance.

While some of this is unavoidable, billions of pounds end up in the taxman's coffers unnecessarily each year. Research by independent advice site found that a whopping £12.6 billion of tax paid each year could have stayed in taxpayers' pockets.
The good news is these unnecessary payments can be avoided. "A bit of careful planning can reduce the amount of tax you pay," says Bob Perkins, technical manager at independent financial advisers Origen.
Follow these steps and, by the end of a working week, you could have sliced thousands of pounds off your tax bill.
Kick off the week by considering the basics. First, make sure you're paying the right amount of tax by checking your tax code. This can be found on your payslip, P60 or your PAYE coding notice. It is usually made up of a series of numbers and a letter – 810L, for example.
To check it's right, multiply the number by 10. If the figure looks wrong, contact your tax office to see whether you're entitled to an adjustment or rebate.
Check you're getting all the tax credits you're due. To do this, use the tax credits calculator on HM Revenue & Customs' (HMRC) website ( to work out your household income and whether you are entitled to Child and Working Tax Credit. For more details, call the Tax Credit helpline on 0345 300 3900.
Also check you're not paying too much council tax. According to, finding out whether you're in the right band is easy and, as well as reducing your annual bill, could mean you receive a rebate.
First check the value of your property back in 1991 when the bands were set. You can do this using a site such as to get a current valuation and then use the Nationwide's house price calculator at to work out what it was worth in 1991.
If your property appears to be in a higher council tax band than it should be, contact the Valuation Office Agency (VOA) and ask it to check. Although is full of tales of people receiving big rebate cheques, it's worth noting that the VOA could also decide your band is too low and increase your council tax bill.
Today, your attention turns to making your savings as tax efficient as possible. Danny Cox, head of financial planning at Hargreaves Lansdown, recommends using a cash ISA. "You can save up to £15,000 into a cash ISA in the 2014/15 tax year and interest is paid tax-free," he explains.
Your kids can also save tax-free through a junior ISA (or a child trust fund if they were born between 1 September 2002 and 2 January 2011). These allow them to save up to £4,000 in the 2014/15 tax year. 
Additionally, as your children have a tax allowance but are unlikely to have any income, they probably won't pay any tax on a normal savings account. To make sure they don't, complete form R85 at their bank or building society.
If you've used up your ISA allowance, NS&I has a number of tax-efficient savings products worth a look. These include its children's bonds; and, if you don't mind a gamble, its premium bonds. Unfortunately, its index-linked and fixed interest savings certificates are currently unavailable.
Even with taxed products, you may be able to reduce the amount of tax taken. Patrick Murphy, chartered financial planner at Zen Wealth, explains: "If your partner pays a lower rate of income tax than you, consider placing savings in their name to reduce the tax on interest."
Your investments and pensions are the focus for Wednesday's tax saving exercise. "Use your ISA allowance," says Murphy. "This provides an income tax and capital gains tax investment wrapper, allowing you to shelter up to £15,000 in the 2014/15 tax year."
The income tax savings depend on the underlying investment. With equities, you still have to pay 10% tax on dividends, so if you're a basic-rate taxpayer, you'll be no better off. Higher-rate taxpayers do make savings, reducing the tax paid on dividends by 22.5% (outside the wrapper they would pay 32.5%). 
Locking your money away in a pension can generate higher levels of tax savings. Anything you pay into a pension will automatically get tax relief at 20%, turning a contribution of £80 into £100, with higher-rate taxpayers able to claim back a further 20% tax relief through their tax return. This means a £100 pension contribution costs a higher-rate payer just £60.
With such healthy levels of tax relief, there are limits on the amount you can save each year. You can invest 100% of your earnings up to a maximum of £50,000 a year, with a lifetime limit of £1.5 million.
Cox suggests examining whether your partner can make a pension contribution. "Even someone unemployed can pay into a pension," he says.
You can boost your pension through salary sacrifice, whereby you redirect part of your pay or a bonus into your pension, saving you tax and national insurance (NI). Your employer will also save on NI, at the rate of 13.8%, and may decide to add this saving to your pension pot.
A spot of inheritance tax (IHT) planning won't make you richer, but it can save your loved ones having to hand over a significant sum to the taxman when you die. IHT at 40% is charged on the value of your estate that exceeds the nil-rate band of £325,000. As the government has signalled its intention to freeze the nil rate until 2018 (to fund social care), IHT is an issue that can only get bigger.
Perkins recommends working out whether you have a IHT problem by calculating the value of your estate – all your assets, including your home and your share of anything owned jointly. Those married or in civil partnerships can transfer their nil-rate band to their partner, giving the surviving partner double the nil-rate band when they die.
"This can make planning easier," says Perkins. "But, if you have an asset likely to grow faster than the nil-rate band – your home or an investment, for example – you might consider giving it away on first death so that it is out of the surviving spouse's estate."
If your estate is worth more than the nil-rate band, Perkins recommends taking advantage of some exemptions. Some gifts take seven years to leave your estate, but others are immediately IHT exempt. These include an annual gift of up to £3,000; as many gifts of up to £250 per person per year as you like; wedding gifts, which can be of up to £5,000 if you're a parent of the bride or groom; and regular payments out of taxed income, providing they don't affect your normal lifestyle.
Gifts to charities are also exempt. Perkins says you might want to consider increasing what you leave to charity in your will. "If you leave 10% or more of your estate to charity, the rate of IHT applied to the rest of your estate in excess of the nil-rate band will fall to 36%," he explains.
More complex tax-planning strategies include using a trust, investing in a portfolio of shares listed on the Alternative Investment Market or in an enterprise investment scheme (EIS) or, as a final resort, taking out life insurance to cover a future liability – which, providing you write it in trust, will ensure the money isn't paid into your estate and is available quickly so your family can settle any IHT bill.
Capital gains tax is another area where a little bit of planning can help you avoid a hefty bill. This is paid at the rate of 18% for basic-rate taxpayers, or 28% for higher-rate taxpayers, on any profits you make in excess of the annual allowance of (£11,000 for 2014/15) when you sell or give away assets such as an investment, shares or a property that is not your main residence.
There are simple ways to sidestep this tax. Married couples and civil partners can take advantage of rules that allow them to pass assets to each other without CGT being levied. Patrick Connolly, certified financial planner at AWD Chase de Vere, says: "If you have a large liability and your partner doesn't, transfer assets to them to use both your CGT allowances, equal to £22,000."
If this isn't an option or it still leaves you with a liability, time the sale of the asset over two or more tax years to use up more than one year's allowance. You can offset the gains against the sale of other assets that have made a loss. 
"You might also want to look at ways to reduce your income, perhaps by making pensions contributions, if this will allow you to pay CGT at 18% rather than 28%," adds Connolly.
It's worth noting that some investments are exempt from CGT. These include ISAs, venture capital trusts and EISs. However, Connolly cautions that the latter two are high risk.

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