|Posted by ANNETTE AKUAKU on March 5, 2012 at 3:45 PM|
Six easy ways to legallypay less tax
No one likes paying tax. So here’s how to pay lessof it.
How to pay less tax without breaking the law (Image© Fotolia)
New research by professional advice website unbiased.co.uk claims we’llcollectively gift the taxman £12.6 billion, or £421 per taxpayer, this year.
The company’s annual Tax Action report highlights 10 examples of tax wastage,either benefits we’re not claiming or tax breaks we’re not using.
The biggest area of wastage the report highlights is income-related tax credits,which include Child Tax Credits, Working Tax Credits and Pension Credits.
Failing to take advantage of the tax relief available on pension contributionsis the second biggest waste, with not using tax relief on charity donationsthird.
Here’s the top 10 list of our biggest tax wastes:
of Tax Wastage
Income-related Tax Credits
Tax relief on pension contributions
Tax relief on charity donations
Savings on Inheritance Tax
Making use of ISAs
Avoiding penalties for late filing of tax
Savings on Capital Gains Tax
Making use of Employee Share Schemes
Income tax and Personal Allowances
So now you know where you’re paying tax unnecessarily, I’m going to show yousix ways you can stop wasting your money and pay less tax.
1. Get an ISA
One problem with saving money in a standard savings account is that you have topay tax on any interest you earn on those savings. And with interest rates solow on many savings accounts right now, this really is the last thing we allneed.
So to avoid this, make sure you invest in an ISA. This is a tax-free way of saving and youcan invest up to £10,680 in an ISA each tax year. You can invest the fullamount in a stocks and shares ISA, oryou can split your investment between a cash ISA (up to £5,430) and a stocks and sharesISA.
You can also stash tax-free cash for your children by opening a Junior ISA (up to £3,600 during the current taxyear) or by saving into an existing Child Trust Fund (the savings limit onthese have now been raised to £3,600 a year in line with the Junior ISA limit).Or you could consider starting a pension for them.
[Related link: Compare ISAs online]
2. Use your pension
By using a pension to save for retirement, you’ll also avoid paying tax. That’sbecause your pension contributions qualify for tax relief. So if you’re a basicrate taxpayer, you’ll qualify for tax relief at a rate of 20%. Meanwhile,higher rate taxpayers qualify for tax relief at a rate of 40% and additionalrate taxpayers will get 50%.
So pensions are a great way to build up a tax-free nest egg for yourretirement. That said, once you start to claim your pension income, you willhave to pay income tax.
You should note that the amount you can contribute to your pension tax free isnow limited to £50,000 a year.
3. Use your partner
If you’re a taxpayer, but your partner isn’t, a great way to save tax is totransfer any income producing assets to his/her name and receive the lower taxrate by using his/her personal allowance. Your personal allowance is the amountof money you can earn before having to pay tax.
The table below shows the personal allowance for the current tax year andnext:
Allowance for those aged 65-74
Allowance for those aged 75+
4. Check your tax code
Your employer uses a tax code to calculate how much tax should be deducted fromyour pay. But how many of us actually bother to check our tax code to see ifit’s correct?
Your tax code is made up of a few numbers and a letter. If you multiply thenumbers as a whole by 10, that’s how much money you can earn before you startpaying tax. The most common number is 747, as for most people it’s only onceyou earn more than £7,475 that you start paying tax.
Meanwhile, the letter refers to your tax status and how that affects thepreceding number. The most common letter is L, meaning you qualify for thebasic personal allowance. You can find out more about all of this on this page of the HM Revenue & Customssite.
If you check your tax code and you think there’s been a mistake, you need tocontact your tax office.
5. Be careful what you give
In each tax year, you can gift up to £250 to as many people as you like,completely free of inheritance tax. Just bear in mind you can’t give a largersum of money and claim exemption for the first £250.
You can also give away £3,000 in total each tax year and if you don’t use yourfull allowance, you can carry it over into the next tax year. However, youcan’t combine this £3,000 allowance with a £250 gift to the same person.
Wedding or civil partnership ceremony gifts are also exempt from inheritancetax – although there are limits to this:
Parents can each give cash or gifts worth £5,000Grandparents and great grandparents can each give cash or gifts worth £2,500Anyone else can give cash or gifts worth £1,000
However, you will need to give this gift (or promise to give it) on or shortlybefore the date of the ceremony.
Gifts to UK charities are also tax-free.
6. Use your capital gains tax allowance
Each of us has a yearly capital gains tax (CGT) allowance (£10,600 in2011/2012), so only gains above this band will be liable to CGT.
In other words, each of us can make profits of £10,600 each tax year fromselling assets or investments before we have to pay tax.
Any profits made above this level will be subject to tax at 18%, or 28% ifyou’re a higher-rate taxpayer.
So each year, before the tax year ends (now is the perfect time), considerselling assets to use up your allowance and make a tax-free profit. It’s a goodidea to spread this over a couple of years to make the most of your allowance.For example, if you sold some shares today and then more on 6 April 2012, you’dbe able to take advantage of two years’ CGT allowances totalling £21,200.
Don’t forget that children also have a CGT allowance of £10,600, so if theyhold an investment they can make tax-free profits up to this level each taxyear.