10 Tips To Help Reduce Your Tax Bill
Here in the UK, we pay more than 450 billion GBP in taxes each year
. Are you paying more than you need to? Read the following top ten tips to help you reduce your tax bill and ensure you pay no more than you absolutely have to.
* Know your personal allowances
Your personal allowance is the amount of income you have from employment, savings and pensions before you begin paying tax. For the tax year ending April 2009, some of these allowances are 6035 GBP for a single person, rising to 6475 GBP next year, 9030 GBP for pensioners aged between 65 and 74 and 9180 GBP for pensioners aged over 75.
If you think you have paid too much in tax get in touch with your local HM Revenue and Customs office, where you can claim a rebate.
* Ensure your tax code is correct
Every year millions of pounds are wrongly deducted in tax due to the wrong code being issued to taxpayers. HMRC work out your tax code by deducting your benefits from the amount stated in your personal allowance. Benefits may include things like private medical insurance or a company car and pensioners will have their state pension deducted from this allowance. Other deductions include interest on savings and share dividends.
If you are on the basic personal allowance of 6035 GBP, your tax code will include the number 603.
Along with this number is a letter, which shows the band you fall into.
L - Basic personal allowance
P - Aged 65 - 74 with full personal allowance
Y - Aged 75 or above with full personal allowance
V - Aged 65 - 74 and eligible for both a full personal allowance and a married couple's allowance, paying basic tax rate.
K - No allowances or owe HMRC money.
T - A temporary code issued because HMRC need further information to allocate you a code.
* Avoid paying tax on savings
Any interest you earn on your savings is taxed each year. If you are a non-taxpayer, you can have this interest paid tax-free by filling out an R85 form at your building society or bank.
* Avail of your partner's allowance
Make full use of all your partner's allowances, particularly if they are taxed at a lower rate. As high taxpayers pay tax on all interest earned on savings and from share dividends, it makes sense to put any savings into your partner's name, as this will mean less tax will have to be paid. Also, you should avoid keeping savings in joint accounts, as HMRC will assume half the interest earned is yours.
* Make the most of your savings
Use your savings to invest in a cash ISA. You will gain more interest than with a regular savings account and it has the added benefit of being tax-free. Stock market ISAs do not attract capital gains tax and income tax doesn't have to be paid on corporate bond income. If you pay higher rate tax, you can also avoid paying extra tax on any dividends.
* Offsetting your mortgage
Some financial lenders will allow you to set any savings you have against your mortgage, rather than paying tax on the savings interest. Offsetting your mortgage means you won?t earn any interest from your savings but will pay out less on your mortgage, cutting its term.
* Take out a pension
Putting your money into a pension fund is a great way of avoiding tax. For every 78 GBP saved, you get 22 GBP back in tax. If you are a high rate taxpayer, the extra 18% can be claimed back, meaning every 100 GBP investment will only cost you 60 GBP.
When you reach retirement age, you are able to take 25% of your savings in a lump sum, tax-free. However, your pension income will be taxed. A final salary scheme is the best option to choose if your employer offers this. With this method, your pension is based on your leaving salary and the number of years worked.
* Avoid the age trap
This is the allowance trap loathed by those of a pensionable age. The higher tax allowances are removed from pensioners once their earnings reach 20,900 GBP a year. Once it is triggered, 1 GBP of allowances is taken for each 2 GBP of income until the allowance drops to that of under 65s. This means pensioners pay 33% on a portion of their income.
If you are reaching the age and income levels that trigger this trap, it might be a good idea to put your money into a tax-free scheme such as an ISA or National Savings Certificates. You may also like to consider insurance company bonds as a means to delay paying tax. However, it's a good idea to get professional advice before going ahead with these as you may end up with even less income than before.
* Make use of your Capital Gains Tax allowance
Everyone is entitled to make 9200 GBP annually in capital gains without having to pay tax; however, not many people take full advantage of this. One way of getting the best out of this is by using equity bonds. This involves investing a lump sum for a specified number of years with your return based on rises in the stock market.
Some schemes will guarantee your capital but others will not, making them extremely risky. If the bond is issued by an insurance company, any profit is normally regarded as capital gains, enabling you to earn 9200 GBP before having to pay tax. However, with others it may be treated as income, losing you more in tax. Use an independent advisor to find out more about these bonds, the risk involved and their status regarding tax.
* Use Gift Aid
Use Gift Aid when making a donation to charity. This allows those in a higher tax band to claim back a portion in tax as well as boosting the donation to charity. For each 10 GBP given, you can claim 2.30 GBP in tax relief and the charity receives an extra donation of 2.80 GBP. To avail of Gift Aid, keep a record of all donations made to charity and include them with your tax return.
by: David de Souza
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