Five Ways to Save Tax

Introduction

Few of us like paying tax. Indeed, for most people, the thought of having to do so is almost an insult. Yet, astonishingly, HM Revenue & Customs makes billions of pounds out of UK taxpayers through simple errors, or because we fail to make the best use of our allowances.

If you want to save tax, here are five simple tips on how to do it:

1) Claim all your entitlements

The UK tax regime is incredibly complicated. Few of us realise the things we are entitled to claim, or offset our earnings against.

If you are self-employed, make sure you know everything that you can claim against to offset your tax bill.

There are three main things to watch out for:

• Child Tax Credit (CTC)
• Working Tax Credit (WTC)
• Pension Credit (PC)

All three will entitle you to more money, depening on your earnings.

For Child Tax Credit, nine out of ten families with children qualify. How much you get depends on things like:

• How many children or qualifying young people live with you
• If any child or young person is disabled
• Your income

You don't have to be a parent either – anyone who is mainly responsible for a child can claim.

To check whether you qualify and for details on how to apply, go to the government’s DirectGov website here.

Working Tax Credit is a payment tops up earnings of low paid working people, whether employed or self-employed, including those who do not have children.

Again, what you receive depends on your earnings. To find out if you qualify, check via the DirectGov website here.

Pensions Credit is an entitlement for people aged 60 or over. It guarantees everyone aged 60 and over an income of at least £119.05 a week if you are single, or £181.70 a week if you have a partner.

Also, if you or your partner are 65 or over you may be rewarded for saving for your retirement, up to £19.71 if you are single or £26.13 a week if you have a partner.

Yet all the evidence suggests that up to 25 per cent of those eligible for Pensions Credit fail to make a claim. To claim, go to the Pension Service website here.

2) Use your spouse’s tax allowance

Tax on money held in a savings account is 20 per cent. If you are a higher-rate taxpayer, you pay 40 per cent.

If you are married and one of you is a higher-rate taxpayer while the other is not, you can use a spouse’s lower tax band to save money.

If he or she is on a 20 per cent rate , their tax on savings is 20 per cent. If they are not working, they pay no tax on their savings. All they need to do is fill in an R85 tax form, which is available online by clicking here.

3) Use your pension tax relief

Setting up a personal or stakeholder pension means you receive tax relief at your standard rate.

In other words, if you contribute £78 into a pension, the taxman chips in another £20. For higher-rate taxpayers, the Revenue’s contribution rises to £40 for every £60 you pay in.

For the self-employed paying that £100 into a scheme, this relief means that you receive the £22 on your contributions you make and can then reclaim £18 off your tax bill.

When the pension matures, you can claim up to 25 per cent of that pension pot as a tax-free lump sum. For those in occupational schemes, the position is more complicated, but you can still claim a proportion of your pension as a tax-free lump sum in a similar way.

4) Sort out your inheritance tax

The first thing you should do is make a will, ensuring that disposals after your death take place in the way you intend.

Second, you can take advantage of various ways of reducing your inheritance tax bill.

One of them is to use the “7-year rule”, whereby disposals of your assets made seven years prior to your death are not taxed as part of your estate after your death.

You can also make a series of cash payments to various family members, use trusts to dispose of your assets, use “deeds of variation” to alter the will even after a person’s death, even set up a life insurance policy to pay out enough to meet the tax bill after your death.

You can find out more by looking at our Guide to Inheritance Tax.

5) Reduce your capital gains tax liabilities

Many people assume that capital gains tax (CGT) is something that only applies to the better-off. After all, when was the last time that anyone made CGT gains of more than £9,600 (the limit for 2007-2008), in any tax year?

In fact, it is easy to find oneself facing large CGT bills, especially if you own a second property and sell one of them, or sell some shares to fund your retirement.

The good news is that CGT is subject to what is called “taper relief”. This means that the longer you hold an asset, the less tax you pay on it. Business assets receive more aper relief than non-business ones. You can find more details in our [LINK]Capital Gains Tax Fact Sheet.

But there are other ways of cutting your CGT bill as well. Here are some of them:

• Offset losses against gains: if you hold a range of assets, such as shares, there is a possibility that you may have recorded losses on some of them. In this case, consider disposing of assets that have shown a loss at the same time. You can set that loss against a taxable gain.

• Maximise tax-free gains. Everyone, including children, has the same CGT allowance. Spread ownership of your investments to maximise your tax-free gains.

• Transfer assets to your spouse. CGT allowances apply to individuals: therefore spouses receive a double allowance. You can effectively double your tax-free allowance, if you are married, by giving assets to your spouse to dispose of.

• Use lower rate tax bands. Since CGT is added to your income to determine the level at which it should be paid, gains should be realised by the spouse with the lower rate of tax.

• Make best use of exemptions. If you own two homes, within two years of acquiring the second one decide which one you want to treat as your primary residence for tax purposes.

• Defer the gain. If there are no losses or reliefs you can use to cut your tax bill, you can defer it by reinvesting the gain in venture capital trusts or in the shares of certain small companies.

In all cases, you are likely to need tax advice from an expert to maximise the amount you save. Here are some places to go to:

Institute of Chartered Accountants in England and Wales (ICAEW): http://www.icaew.co.uk/

Institute of Chartered Accountants of Scotland (ICAS): http://www.icas.org.uk/directory/

Institute of Chartered Accountants in Ireland (ICAI): http://www.icai.ie/index.cfm