No one in the UK likes paying the taxman. So here's how to pay less tax!
Research by professionals claim we’ll collectively gift the taxman £12.6 billion, or £421 per taxpayer, this year.
Tax Action reports highlight ten examples of tax wastage, either benefits we’re not claiming or tax breaks we’re not using.
Some of the biggest area of wastage in the report highlight income-related tax credits, which include Child Tax Credits, Working Tax Credits and Pension Credits.
The public's failing to take advantage of the tax relief available on pension contributions is the second biggest waste, with not using tax relief on charity donations third.
Here are the top ten list of biggest tax wastes:
List of Tax wastage and their amount of wastage:
Income-related Tax Credits: £7.26 billion
Tax relief on pension contributions: £2.45 billion
Tax relief on charity donations: £997 million
Savings on Inheritance Tax: £448 million
Making use of ISAs: £403 million
Child Benefit: £401 million
Avoiding penalties for late filing of tax return: £307 million
Savings on Capital Gains Tax: £133 million
Making use of Employee Share Schemes: £118 million
Income tax and Personal Allowances: £83 million
Total: £12.6 billion
So it should become clear where you’re paying tax unnecessarily, So to help we at Tac Affinity Accountants are going to show you six ways you can stop wasting your money and pay less tax.
Have an ISA One problem with saving money in a standard savings account is that you have to pay tax on any interest you earn on those savings. And with interest rates so low on many savings accounts right now, this really is the last thing we all need.
Related how-to guide Cut your tax bill by thousands Tax may be an inevitable fact of life, but there’s no reason to pay more than you have to!
So to avoid this, make sure you invest in an ISA. This is a tax-free way of saving and you can invest up to £10,680 in an ISA each tax year. You can invest the full amount in a stocks and shares ISA, or you can split your investment between a cash ISA (up to £5,430) and a stocks and shares ISA.
You can also stash tax-free cash for your children by opening a Junior ISA (up to £3,600 during the current tax year) or by saving into an existing Child Trust Fund (the savings limit on these have now been raised to £3,600 a year in line with the Junior ISA limit). We took a look at the top Junior ISAs on the market at the moment inthe article Your child could earn 6% from an ISA. Or you could consider starting a pension for them. Find out more about all these tax-efficient savings options for children in Top tax havens for babies, children and teens.
By using a pension to save for retirement, you’ll also avoid paying tax. That’s because your pension contributions qualify for tax relief. So if you’re a basic rate 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 additional rate taxpayers will get 50%.
So pensions are a great way to build up a tax-free nest egg for your retirement. That said, once you start to claim your pension income, you will have to pay income tax.
You should note that the amount you can contribute to your pension is now limited to £50,000 a year.
If you’re a taxpayer, but your partner isn’t, a great way to save tax is to transfer any income producing assets to his/her name and receive the lower tax rate by using his/her personal allowance. Your personal allowance is the amount of money you can earn before having to pay tax.
The list below shows the personal allowance for the current tax year and next:
Allowance for those aged 65-74
Allowance for those aged 75+
4. Tax Code
Your employer uses a tax code to calculate how much tax should be deducted from your pay. But how many of us actually bother to check our tax code to see if it’s correct?
Your tax code is made up of a few numbers and a letter. If you multiply the numbers as a whole by ten, that’s how much money you can earn before you start paying tax. The most common number is 747, as for most people it’s only once you earn more than £7,475 that you start paying tax.
Meanwhile, the letter refers to your tax status and how that affects the preceding number. The most common letter is L, meaning you qualify for the basic personal allowance.
If you check your tax code and you think there’s been a mistake, you need to contact your tax office. In some cases you can claim up to £1,300 of your tax back.
5. Give it away
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 larger sum 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 your full allowance, you can carry it over into the next tax year. However, you can’t combine this £3,000 allowance with a £250 gift to the same person.
Wedding or civil partnership ceremony gifts are also exempt from inheritance tax – although there are limits to this:
Gifts to UK charities are also tax-free. So its worth finding out how to cut your tax bill without the effort of complex tax planning.
6. Capital Gains Tax allowance
Each of us has a yearly capital gains tax (CGT) allowance (£10,600 in 2011/2012), 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 from selling assets or investments before we have to pay tax.
Any profits made above this level will be subject to tax at 18%, or 28% if you’re a higher-rate taxpayer.
So each year, before the tax year end, consider selling assets to use up your allowance and make a tax-free profit. It’s a good idea 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’d be 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 they hold an investment they can make tax-free profits up to this level each tax year.
Tax Affinity Accountants are experts in tax and accounting. For more interesting articles and help visit www.taxaffinity.com. Please feel free to comment and share this with your friends.
Buy-to-let properties have attracted thousands of investors. But before you take the plunge, it's important to consider the tax implications.
Taxes on buy-to-let properties: Britain's landlords are required to pay tax on rent and capital gains tax, but there are ways to minimise this.
Rent income will be treated as income and taxed in line with your basic or higher-rate tax bands.
You can, however, be able to offset mortgage interest payments, letting agency costs and maintenance expenses against the taxable rental income.
This can make it more tax-efficient to have a mortgage on your investment property rather than your main home where you can no longer get tax relief on your mortgage.
Rental incomes should be declared on an annual self-assessment tax return, it may be worth seeking an accountant to ensure all tax breaks are taken advantage of.
Tax on the property price rise
Capital Gains Tax (CGT) comes in when you sell a buy-to-let property at a profit.
From April 2008, capital gains tax was changed to a flat rate of 18%. Any gains above the annaul £10,100 (2009/20) personal threshold will attract CGT.
Before CGT as charged at up to 40% and taper relief cut this, if a property had been owned for more than three years. This no longer applies.
Capital gains tax applies to any property which is not your main home, known as the Principal Private Residence. If you only have one property and it is considered your PPR, then you do not have to pay CGT, however, the taxman may want evidence that you were actually living there.
CGT liabilities should be declared annually on your tax return and anyone making a substantial sum from selling a property should seek out a good accountant, who can take advantage of all available breaks.
Stamp duty tax is payable on buy-to-let properties by the purchaser, as all other residential properties. The current rates are 1% above £125,000, 3% above £250,000 and 4% above £500,000. A stamp duty holiday currently applies until the end of the year on all properties under £175,000.
Most people think that one way to dodge tax - and are often advised by accountants - is to put a second home in the name of their partner. When they come to sell, they claim their partner has been living in the property thereby making it exempt from CGT.
This choice is easier for people who have done let-to-buy: they keep the mortgage on the first home which they lived in - and then take a second traditional mortgage with another lender on an additional home where they live.
In this way you can bypass the need for a proper buy-to-let mortgage on the first property, which would alert the taxman. However, it breaches the lender's rules, which means they could call in the loan without notice. More importantly, evading CGT in this way would be treated as illegal and result in fines or even imprisonment.
However, there are more complicated ways of mitigating tax on buy-to-let, including setting up a company to own the properties. For the average amateur investor this is not worthwhile as it is expensive, complicated and can limit access to mortgage finance.
Cutting down on capital gains tax
Typically, buy-to-let owners and those with second homes can slash tax bills if they have ever lived there as their principal private residence and through lettings relief
And everyone's main home - or principal private residence as the taxman catchily names it - is exempt from capital gains tax when sold, but any other properties they own attract CGT at their highest rate when sold.
For example - an unmarried couple may each own a home that qualifies as their principal residence but a married couple may only nominate one property and must elect jointly.
And it is possible to cut capital gains bills by living in the second property for a period of time. Special rules apply to properties that have been a main residence. The period when it was the main residence is exempt, plus the last 36 months of ownership.
As for those who have previously rented out their main residences there is the added benefit of being able to claim up to £40,000 letting relief. This is available to anyone with a share in the property - giving a couple, even if married, up to £80,000 between them.
Finally, the amount of private letting relief that can be claimed cannot be greater than £40,000 and must be the lower of that sum, the amount of principal private residence relief being claimed, or the capital gains made during the letting period.
The best advice however that the wisest of investors make sure to have is to use a clever tax accountant to handle your affairs. The tax saved will be much greater than the fees they will ever charge.
Tax Affinity Accountants based in Kingston Upon Thames, are experts in tax and accounting. Visit www.taxaffinity.com for more interesting articles. Please feel free to comment and share this article with your friends.
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