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Slash your tax bill in just five days
By Sam Barrett
Tax might not be the most exciting of topics, but with billions of pounds paid in unnecessary tax every year, dedicating some of your attention to your tax affairs could make you considerably better off.According to research by unbiased.co.uk, £9.3 billion is wasted on tax every year and some of this money could be yours.
Getting your hands on your share is fairly straightforward too, with some small tweaks potentially shifting large amounts of money out of the taxman's coffers and into yours. Set aside a few hours a day for a one week to improve your tax situation and you could be quids in.
Monday
Today's the day to address the basics. First is your tax code. This is used to determine how much tax you pay, taking into account factors such as your personal allowance and any taxable benefits you receive."It's worth checking, especially if you're entitled to an age-related allowance or you've changed the taxable benefits you receive," says Malcolm Cuthbert, managing director of financial planning at Killik & Co.Your PAYE Coding Notice, which is sent out by the tax office in the first couple of months of the year, will explain how your tax code is made up.
If this isn't right, you need to contact your tax office, which will be able to make any amendments. Go to directgov.uk for details.
Next on the list is tax credits. Nine out of 10 families with children qualify for child tax credits; providing your household has an income of less than £58,000 (£66,000 if you have a child under one), you'll be eligible. To make a claim, you need to contact HM Revenue & Customs on its tax credit helpline, 0845 300 3900, or online at hmrc.gov.uk/taxcredits.
Another seriously under-claimed tax credit is the pension credit. This guarantees a minimum weekly income of £124.05 for single people aged 60-plus or £189.35 for couples. Also, anyone aged 65-plus who has saved towards their retirement may be entitled to a credit of up to £19.71 a week or £26.13 for couples. Again, to find out if you are eligable, contact HM Revenue & Customs.You should also make sure you're not paying too much council tax. If you're on the wrong band, you could end up paying hundreds of pounds extra a year. Go to voa.gov.uk/council_tax to check whether you're in the right band. Alternatively, check with your neighbour to see whether you're paying the same amount.
Tuesday
Day two is all about your savings, and making sure you're taking advantage of any tax breaks that are available.
First, consider where you've got your savings. "If you've got money on deposit, use your cash individual savings account allowance," says Bob Perkins, technical manager at independent financial advisers Origen. "Rates can often be higher than on standard savings accounts and, with interest rates low, the tax savings can make a big difference."Even if you're a non-taxpayer, it's worth using your ISA allowance as your tax position may change in the future.
Other tax-free savings products are available, with National Savings & Investments home to a number of them. These include index-linked savings certificates and fixed-interest savings certificates. "Returns aren't great," says Perkins, "but you can get your interest tax-free, which may be beneficial, especially if you're a higher-rate taxpayer."
As well as your own tax position, that of your kids is also important. They have exactly the same personal allowance as an adult (£6,035 in 2008/09, £6,475 in 2009/10), but because most of them don't earn anything, this rarely gets used up. Because of this, interest on savings accounts can be paid gross; form R85 from their savings provider will ensure this happens.
This only applies if they get their money from someone other than their parents. Where parents save on behalf of a child, the tax rules are different. Only £100 of interest (per parent) can be earned free of tax. Where interest from the parent's gift exceeds this level, the whole lot will be taxed as the parent's income. This is to prevent parents from holding their own cash savings in their children's names and taking advantage of the tax allowances. But this problem can be avoided by using a child trust fund, which is basically a tax-free savings vehicle, introduced for children born on 1 September 2002 or later.
Tony Anderson, marketing director at The Children's Mutual, explains the tax benefits: "The CTF grows free of income or capital gains tax and, unlike other savings or investment accounts, it's not subject to the £100 income limit for parents."CTFs were started by the government in 2005 to encourage parents to make long-term savings for their offspring. If you have a child born on or after 1 September 2002 you will receive a £250 voucher to start their account. You then receive another £250 voucher when the child turns seven - the vouchers are each worth £500 if you qualify for full tax credit on each occasion. Family and friends can top them up to a maximum of £1,200 a year.
Finally, if you have a partner, it's also sensible to consider whether you could arrange your savings more efficiently. "If you pay different rates of income tax, move any savings into the name of the person paying the lower rate," says Malcolm Cuthbert. "This will save you tax."
Wednesday
By the middle of the week, you should turn your attention to making sure any investments or pensions you have are as tax-efficient as they can be.First, stocks and shares ISAs. You can pay up to £7,200 into these each tax year, minus anything you put in your cash ISA. As well as being capital gains tax free, they also have income tax advantages.
"You can't claim back the 10% tax credit on dividends, but if you have a bond or fixed-interest ISA, these are income tax free," says Bob Perkins, adding that the current market conditions are also producing some good levels of income on bonds.For longer-term planning, pensions are another tax-efficient option.
You can pay in up to 100% of your annual earnings, provided this is less than the annual allowance (£235,000 for 2008/09), with HM Revenue & Customs giving you tax relief on your contributions. For basic-rate taxpayers, this is 20%, while for higher-rate taxpayers it's 40%. It doesn't even have to be your own pension, as Cuthbert explains: "Anyone, including children, can have £3,600 a year paid into a pension, regardless of income. As this includes tax relief, this means you only need to pay in £2,880 to get the full £3,600.
"There are ways to bump up your own pension too. "Salary sacrifice allows you to replace part of your pay package that's liable to national insurance and tax with something that isn't," explains John Chaplin, director in employment taxes at KPMG.
"This could be childcare vouchers, bikes or, more commonly, pension contributions." Because of the savings on national insurance and tax, you effectively bump up the value of your contribution by about 31% (20% for basic-rate taxpayers plus 11% national insurance contributions).
"If you exchange a 5% contribution with a 5% reduction in pay, you'll get roughly 6.5% of your full salary paid into the scheme," Chaplin adds. There are potential catches to watch out for, however. A reduction in salary could affect any pay-related benefits such as maternity pay, redundancy or overtime, although most employers will use a notional pay, which would be the full amount, to ensure you're not disadvantaged. Another potential catch is not reclaiming the additional tax relief if you're a higher-rate taxpayer. You'll automatically receive it if you make contributions through an employer scheme, but if it's your own personal pension, you'll need to complete a self-assessment form to get the additional 20% relief.
Thursday
The fourth day is about looking ahead with inheritance tax planning. Unbiased.co.uk's research found that this is the area where most tax is wasted, with about £1.9 billion of IHT paid unnecessarily last year.Falling property prices and the ability to transfer a nil rate band between spouses or civil partners has made IHT less of an issue, but it's prudent to address this area of planning as the tax is pretty punitive. In 2008/09, IHT at 40% would be charged on anything over a nil rate band of £312,000. While this might seem a lot, with the average house price at £163,966 (Halifax house price index), many people could be well above the threshold.
"Use your annual IHT exemptions as these can help manage any liability you might have," advises Perkins. There are plenty of exemptions available. For starters, you can give someone up to £3,000 a year and it's exempt, plus you can use last year's allowance if you haven't already. On top of this, you can give as many people as you like up to £250 a year and it's instantly out of your estate.Wedding and civil partnership gifts may also be exempt - parents can each give cash or gifts worth £5,000, other relatives can give up to £2,500 each, and anyone else can give up to £1,000.
You can also give away your income, although you do need to be careful, as Perkins explains: "If you make regular gifts out of your income, and by doing so it doesn't affect your standard of living, then these will be outside your estate. You also need to document this."However, for any gifts to be excluded from IHT, you need to live for seven years after making the gift.Another area where you could save tax is your life assurance. By writing it in trust, the proceeds are outside your estate for IHT purposes when you die. Assuming you have other assets worth more than the nil-rate band, using a trust would save £120,000 in IHT on a life assurance payout of £300,000.You may also be able to reduce the tax paid on an estate you've already inherited.
Matt Coward, personal tax director at PKF accountants, explains: "Falling asset values could mean that the estates of individuals who have died in the last couple of years have paid too much IHT. Administrators of estates should investigate if claims for current values can be used and refunds of tax claimed."This could be the case if IHT has been paid on the probate value of a house or land which was subsequently sold for a lower amount within three years of death. Similarly, if IHT has been paid on stocks and shares that are then sold at a lower value, you may be able to claim a tax reduction. IHT planning is often complicated so it's best to seek professional advice from an IFA, trust specialist or solicitor.
Friday
Capital gains may seem unlikely in the current climate but, with indexation allowance scrapped in April 2008, you could find yourself being charged 18% capital gains tax on anything you make in excess of £9,600 (2008/09).
"How long you had held an asset used to be important, but now it's a straightforward case of comparing the price when you bought and sold," says Stephen Herring, senior tax partner at BDO Stoy Hayward. "This works in favour of some people who might have had to pay tax at 40%, but if you've held assets for many years you could now get a tax bill."
Because of this, it's essential that you keep an eye on any gains you make. David Marlow, director at Alexander Forbes Financial Services, explains: "You can make a gain of £9,600 (2008/09) so you might want to take some of this to reduce a future bill. Taken across two tax years, and by using your spouse's allowance too, you could remove close to £40,000 from a gain."Perversely, you could also take advantage of the fall in the stockmarket.
Coward explains: "Many people have stockmarket investments that are now standing at a paper loss. It may be possible to crystallise these losses by a sale, followed by a repurchase by the spouse or within an ISA or trust. The losses will then be valuable when the stockmarket eventually recovers [because they can be offset against future gains].
"Some investments are also efficient from a CGT perspective. As well as ISAs, you might want to consider a venture capital trust (VCT) or an enterprise investment scheme (EIS). Both offer a number of tax breaks including tax-free capital gains, although with the EIS you have to wait three years before this applies.However, Herring recommends caution with VCTs and EISs.
"These aren't slam-dunk tax schemes. They're high-risk investments, and although you might save the CGT, you might lose a lot more if they don't perform well."
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