Tips for Efficient Savings and Investments
There are a range of methods for saving and investing your money more effectively. Summarised below are several straightforward ways to obtain tax-free returns and reduce your tax bill.
National Savings and Investments
National Savings and Investments are backed by the Treasury and thus offer a secure method of saving and investing your money. The tax free savings and investments products currently offered from National Savings and Investments include:
Tax-Free Interest on Savings
Interest from your savings in banks and building societies is usually taxed at 20%, but you may be able to register to receive gross (untaxed) interest if your taxable income is within your tax-free allowance. You can also claim back tax paid unnecessarily on savings in the past.
ISAs (Individual Savings Accounts)
An ISA is a financial product, introduced in the UK in 1999, to allow tax-favoured savings and investment accounts. They can be used to save cash (Cash ISA) or to invest (Stocks and Shares ISA). One can invest a maximum of £11,520 into an ISA in the tax year 2013-14, of which £5,760 may be saved in cash. The remaining sum may be invested in a range of financial products:
No tax is paid on the interest or dividends received from an ISA and profits from investments are exempt from Capital Gains Tax.
Similar to standard ISAs, Junior ISAs offer tax free savings for any child under the age of 18, providing they are not eligible for a Child Trust Fund (CTF) account. The upper limit for a tax free Junior ISA in 2013-14 is £3,720, and once again there is no tax on interest or dividends. However, as with CTFs, the money is locked into the ISA until the child is 18.
Child Trust Funds
Only eligible for children born between 1st September 2002 and 2nd January 2011, CTF accounts can be paid into by parents, family and friends up to a limit of £3,720 tax free for 2013-14. Once again, the money in the CTF account cannot be accessed until the child is 18 years old.
Taxpayers are encouraged by the government to make contributions to pension schemes by offering tax relief on any such payments. Once you retire, you will ordinarily be able to claim 25% of you pension fund as a tax-free lump sum, and then your pension will be taxed in line with standard income tax rates.
Savings in pension schemes are unlimited up to 100% of your earnings each tax year and thus offer an effective method for reducing your tax bill.
By Tom Hoadley. To read more interesting and informative articles by this and other writers visit www.taxaffinity.com/blog. Tax Affinity Accountants are experts in Tax and Accountancy for small businesses and help business across the UK and those abroad that have an interest in the UK. Visit www.taxaffinity.com for more details. 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.
In the current economic climate everyone should be looking for ways to save tax. And to help, we at Tax Affinity Accountants have compiled a list to do just that.
The tax codes, allowances and deadlines
1. Tax code
Check your tax code each year (the numbers and letters on your payslip). If you're on the wrong code, you may be paying too much tax.
2. Capital gains tax allowance
Remember that capital gains under £10,600 are tax-free. Married couples and civil partners who own assets jointly can claim a double allowance of £21,200. CGT is charged at 18% if you are a standard rate taxpayer, and 28% if you pay tax at a higher rate.
3. Tax return deadlines
Don’t miss the 31 October deadline if you want to make a paper tax return. You can do your tax online up to 31 January, but paper tax returns need to be in three months earlier than online tax returns to avoid a £100 fine.
4. Annual investment allowance
If you are a landlord or run your own business, take advantage of the annual investment allowance (AIA) to claim for capital expenditure on items such as tools and computers. You can claim relief on up to £25,000 a year.
How to pay less tax if you're self-employed
5. Tax-deductible expenses
If you’re self-employed, don’t forget to claim all your tax-deductible expenses, including cash expenditure where eligible.
6. Self-employed car costs
If you're self employed, you can claim the running costs of a car, but not the cost of buying one. If you use the same car privately, you can claim a proportion of the total costs.
7. Cash-flow boost for self-employed
If you are setting up as self employed, you may be able to improve your cashflow by choosing an accounting year that ends early in the tax year. This maximises the delay between earning your profits and your final tax demand.
8. Annual losses
If you are self employed, you can carry forward losses from one year and offset them against profits from the next. See our page on when the self-employed pay tax for more.
9. Payments on account
If you are self-employed and expect to earn less in 2012-13 than you did the year before, apply to reduce any payments on account that HMRC ask you to make.
Saving tax on property income
10. Rent a room
Rent a room relief is an optional scheme that lets you receive up to £4,250 in rent each year from a lodger, tax-free. This only applies if you rent out furnished accommodation in your own home.
11. Landlord's energy-saving allowance
If you rent out property you can claim special tax allowance of up to £1,500 for insulation, draught proofing and installing a hot water system.
12. Landlord's expenses
If you rent out property, you can deduct a range of costs before declaring your taxable income. These include the wages of gardeners and cleaners, and letting agency fees.
13. Tax relief on your mortgage
You can claim tax relief on the interest on a mortgage you take out to buy a rental property – even if it the rental property is abroad.
14. Reduce capital gains tax (CGT) on a rental property
Landlords are normally liable for CGT when they sell a rental property. If it has been your main home at some time in the past, you can claim tax relief for the last three years of ownership.
Pay less tax on savings and investments
15. Isa allowance
Use your tax-free Isa allowance. This year, the overall limit is £10,680, of which £5,340 can be put into in a cash Isa.
16. No CGT on shares held in an Isa
There is no capital gains tax to pay when you sell shares or units held in an Isa. For more details see Tax on savings and investments.
17. Junior Isas
Use Junior Isas or Children’s Bonus Bonds to avoid being taxed on gifts you make to your own children.
18. Transfer assets
Transfer savings and investments to your husband, wife or civil partner if they pay a lower rate of tax than you do. See our guide to tax and your partner for more information.
19. Children's savings
Stop children being taxed at source on their savings by completing a simple form (R85) on their behalf.
Tax savings for older people
20. Age-related allowance
If you are aged 65-plus you may be eligible for an increased personal allowance. This means you pay a lower income tax rate. See Tax in retirement.
21. National Insurance
Make sure you stop making National Insurance contributions if you carry on working beyond state retirement age (currently 62 for women and 65 for men).
22. Gift Aid
If you are over 65, making donations to charity through Gift Aid can reduce your taxable income to below the threshold at which you start to lose out on age-related allowances.
23. Tax relief on gifts
If you are in a higher tax bracket, you can claim back the difference between the basic and higher rate of income tax on any Gift Aid donations.
24. Inheritance tax
Lifetime gifts are not normally counted as part of your estate for inheritance tax purposes if you live for a further seven years after making them. Known as potentially exempt transfers (PETs) they can reduce your residual estate significantly. See our blog on inheritance tax.
Tax savings through employee benefits
25. Season ticket loan
If you are a commuter, check to see if your employer will give you a tax-free loan to buy your season ticket.
26. Pool cars
Use a pool car for occasional business travel, if your employer provides these.
27. Childcare schemes and tax credits
If you are an employee and pay for childcare, ask your employer if they have a childcare scheme. Salary sacrifice childcare schemes are easy to establish and can result in substantial savings for both employees and employers. For more details see working for an employer. Child tax credits can also save you money.
28. Company car?
If you are entitled to a company car, consider whether it would be more tax-efficient to take a cash equivalent in pay instead.
29. Going green
If you are changing your company car, consider a low-emissions model . These are now taxed at a lower percentage of their list price, than cars with a high CO2 rating.
30. Pay in to a pension scheme
Contributions to your employer's pension scheme (including any additional voluntary contributions you make) can be made from your gross pay, before any tax is charged.
For the most up to date and accurate advice speak to tax accountant, as these allowances and benefits do change every year.
Tax Affinity Accountants are expert Qualified Tax Accountants in Kingston upon Thames. To read more visit www.taxaffinity.com/blog and please feel free to comment and share this with your friends.
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