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10 steps to a lower tax bill
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How to make the most of your tax allowances and the tax benefits that are available to you. How you can mitigate your annual tax bill and get money back from the taxman!
- Use your personal allowances
- What to do if you are a non-taxpayer
- Check your tax code
- Read what the taxman writes!
- What to do if you are approaching retirement
- Credit where it is due, claim whats yours
- Keep a record of your expenses
- Reconsider the company car
- Prepare for your pension
- Plan properly for the future
Use your personal allowances
Everyone under the age of 65, including children has a personal allowance meaning you can earn the first £5,435 (2008 / 09) of income tax-free. Those aged over 65 and over 75 may benefit from higher personal tax allowances. So, if your spouse has no income, can you transfer investments to him/her? Can you bring them into your business? Even if they already have some income, a transfer might still result in them paying a lower tax rate than you. There is also the annual exemption for Capital Gains Tax (CGT) - £9,600 for 2008 / 09. Transfers between spouses are tax free so use it to your advantage!
If you are not married, be aware that transfers between unmarried partners are taxed as disposals for capital gains purposes - this may well not be a problem, given the CGT annual exemption but it does mean such transfers need handling with care.
In addition to your personal tax allowance, you have opportunities to shelter money from the taxman's clutches through investing up to £7,200 a year in an Individual Savings Account (ISA) if you are over 18. Those aged 16-17 may put up to £3,600 a year into a cash ISA. If you have children who are eligible for a Child Trust Fund account, you may also squirrel away £1,200 a year with no tax implications either for you or the kids.
You can also earn money tax-free if you decide to let out a spare room. Under the Government's 'rent a room' scheme, homeowners can charge rent of up to £4,250 tax free, within a given tax year.
Go to Moneyextra's Tax Centre now .
What to do if you are a non-taxpayer
If you are a non-taxpayer, your first move should be to make sure that you don't pay any tax that you don't have to pay. You should register to get interest on savings and deposits paid gross. Unfortunately you can't reclaim the 10% tax credit on dividends, so, subject to any other considerations, you may prefer to switch from equities to interest-bearing assets that can generate a tax-free income.
Register with your bank or building society to receive interest gross (use Form R85 which your bank or building society will be able to supply) - this applies to children too. However, remember that as far as children are concerned, parents are taxed on any children's income that arises from parental gifts if it exceeds £100 per annum. Income from gifts from other family members is not taxed as parental income.
Check your tax code
Your tax code is used by your employer to calculate the amount of tax to deduct from your pay. If you have the wrong tax code you could end up paying too much or too little tax. The code is made up of a number and, usually, one letter. Usually if you multiply the number in your tax code by 10, you will get the total amount of income you can earn in a year before paying tax. The letter lets your employer know of any adjustments that must be made to this total.
Remember your tax code governs what tax you pay during the year - ensure that you are not paying more than necessary! You need to review the entries on the notice HM Revenue & Customs (HMRC) sends - does it need amendment in any way?
If there is anything you don't understand, or any entry that looks odd, don't just ignore it - ask the Revenue to explain. Check also that company cars or other benefits are properly reflected. Simply being on the wrong code can prove costly, although if you have overpaid tax during the financial year, you may be due for a rebate. Do check your tax code each year. HMRC doesn't always get it right.
Go to Moneyextra's Tax Centre now .
Read what the taxman writes!
Look carefully at what HMRC send you and take it seriously. Have they sent you the right tax return? Have they got everything they should (and nothing they shouldn't!) on your taxpayer statement? Can you handle the enquiry notice they are sending? Keep those records!
Please make sure you get your tax return in by 31 January (remember, if you want HMRC to compute your tax bill, send the return in even earlier, by 30 September.) Penalties apply to late tax returns. Pay your tax bills on time - watch out for payments on account demands and make sure you understand them if you get them (due 31 January and 31 July); final settlement is due 31 January and interest runs on late payments.
Don't adopt the ostrich approach with HMRC correspondence - it won't go away!
What to do if you are approaching retirement
Your first job is to make sure that you will be on the right tax code because your personal allowance may rise from age 65. Form P161 is the one to watch out for. It is sent to pensioners by HMRC when they reach retirement to gather details of their income. The Department for Work and Pensions tells the taxman when someone is due to reach 60 (female) or 65 (male), and the form should then be sent out. Too many pensioners do not understand the importance of the form, and others are not getting it. Make sure you do and make sure you fill it in
If the form is not completed, the taxman will assume you are not entitled to the age allowance. Missing out on the age allowance in error can lead to significant financial loss. For example, for the 2008 / 09 tax year the age allowance will be £9,030 for those aged 65-74, and £9,180 for those aged over 75, compared to the normal personal allowance of £5,435.
Do bear in mind that if you earn more than £21,800 in the 2008 / 09 tax year, the age allowance is cut by £1 for every £2 of income over the threshold until it falls back to the level of the basic personal allowance. However, it will not fall below the basic personal allowance. The taxman giveth and the taxman taketh away again!
The Married Couple's Allowance is only given at 10%, and is only available when one party to the marriage was born before 6 April 1935.
Go to Moneyextra's Tax Centre now .
Credit where it is due, claim what's yours
Over the years former Chancellor Gordon Brown introduced a complex series of credits to boost incomes. These include the Child Tax Credit (CTC), the Working Tax Credit (WTC) and the Pension Credit, all of which are targeted benefits. By the way, even if you don't qualify for any of them, do remember if you have children that Child Benefit is a universal payment to all those people who have kids.
The Government has estimated that 85% of all families with children may be entitled to claim the Child Tax Credit. Couples with children with household incomes of up to £50,000 will qualify for Child Tax Credit. Eligibility for Working Tax Credit is based on annual income for a tax year and runs for 12 months.
Tax credits, like most state benefits, may only be backdated for up to three months. Request a claim form or check your eligibility if you are not currently receiving Tax Credits at www.hmrc.gov.uk/tax credits (0845 300 3900).
Parents, married or unmarried, jointly earning up to £50,000 a year may claim CTC of £545 / year for a child aged up to 16 (18 if in full-time education), doubled to £1,090 / year for families with a child under one. Families with household income below £15,575 may claim CTC of £2,085 / year for each child. Above these thresholds, the credit is gradually withdrawn. The WTC is paid via employers and is worth a basic £1,800 to those eligible.
The Pension Credit is a means-tested benefit for people aged 60 or over. It has two parts - a guarantee credit and a savings credit. Guarantee credit tops up your weekly income to a guaranteed level and savings credit is for people who have a small amount of income or savings. You may be able to claim either part of the Pension Credit separately or together, depending on your circumstances. Arrangements for claiming and paying pension credit are run by the Pension Service .
Keep a record of your expenses
You may be able to claim for additional travel expenses that aren't fully reimbursed by your employer. Any professional subscriptions? Tools of the trade? Keep those receipts! This is particularly important for the self employed - you'll need to draw up accounts annually.
Employees who have flexible working arrangements with their employers and work from home should be able to claim for the cost of business calls. People who run their own businesses from rooms in their homes may be eligible to claim a proportion of the household expenses, such as heating, lighting and telephone calls, against their business income.
Remember that tax relief is available on professional subscriptions which can include membership to bodies such as the Society of Homoeopaths, Institute of the Motor Industry and National Association of Taxi & Private Hire. The HMRC maintains a list of all the professional subscriptions that it is prepared to accept as tax deductible.
Go to Moneyextra's Tax Centre now .
Reconsider the company car
Company cars are still popular perks but the decision on whether they make financial sense is a complex one. If you're offered a company car, consider what value it has to you in financial terms. Take into account the fact your repair bills, road fund and insurance will be taken care of by your employer, but also consider the tax bill you'll face because such perks are considered as 'benefits in kind' by the taxman.
Since April 2002 company car tax has been based on the car's list price and official C02 emission figure. A minimum charge of 15% of the car's price will apply to cars emitting CO2 at or below a specific level, measured in g/km. This charge rises in 1% increments for every 5g/km over the minimum level. (There is an upper ceiling of 35%). So you need to know the price of the car and its emissions level in order to work out what it will cost you in tax.
With employers routinely offering their employees the opportunity to take cash, or introducing schemes whereby the employees take ownership of the car but apply for benefits such as group insurance and vehicle discounts, running a company car is not as automatic a choice as it once was. So weigh up the alternatives and when you are considering a change, make sure that you do the sums - and tell the taxman if you no longer have a company car so that your tax code can be adjusted. Equally tell them when you are first given or change your car.
Prepare for your pension
First, make sure that if you are a higher rate taxpayer making contributions to a personal pension you notify the tax office or include it on your tax return. By now you should be aware that there is what newspapers describe as a crisis in pensions. The problem is that we are collectively not saving enough for our future comfort. So, quite simply, you need to save more.
Since A Day (6 April 2006) you can receive tax relief on contributions up to your taxable earnings, subject to an annual limit of £235,000 and a lifetime allowance for your pension pot of £1.65 million (both limits are for the 2008 / 09 tax year). You may fund a Stakeholder Pension up to £3,600 gross per year without reference to earnings.
All the old highly-complicated age-related rules have been junked. The bottom line, however, remains the same: you need to save for your old age and you probably need to save more than you are already putting by.
Plan properly for the future
Prepare for the impact of Inheritance Tax and Capital Gains Tax. Do you qualify for entrepreneur's relief on your disposals? On death there is a nil rate Inheritance Tax band of £312,000 for 2008 / 09. Any excess has a tax rate of 40%. There are a number of ways round the Inheritance Tax limit.
There are several ways of maximising your current £312,000 entitlement such as making a will, making lifetime financial gifts, potentially exempt transfers and remembering that the transfers of property and gifts between UK domiciled spouses - no matter how large in value - are exempt from Inheritance Tax.
You may also wish to consider establishing other trusts for beneficiaries to manage your assets in a tax-efficient manner. Be aware that in recent years a number of rules have been introduced to cut down on these avoidance measures. It is imperative if you have trusts in place or are considering using them that you take independent financial advice. In fact, anybody facing a potential Inheritance Tax liability would do well to take independent financial advice about mitigating their estates tax bill.
The most important tip is to make a Will - that may not save tax by itself but at least it means you are saying where you want your assets to go.
Go to Moneyextra's Tax Centre .
26 March 2008 © Moneyextra.com
MoneyExtra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.