Tax Basics |
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Your Money > Tax Articles > Six ways to...
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By Alison Hunt
Don't waste thousands each year paying unnecessary cash to the government - check out these easy tips and slash that tax bill now. While taxes are certainly never convenient, they are a necessary evil. That said we should ensure that we're not paying more than we need. It's therefore vital to keep on top of your tax situation, check your banding frequently and make sure you're not paying too much. Here are some of the easiest ways to minimise the tax you have to cough up. 1. Cash ISA When you've already paid tax on your earnings the last thing you want is to pay more when you try and save. So as well as making your hard earned cash work as hard as you can, make it as tax efficient as possible, too. And the easiest way is to make sure you use up your Cash ISA allowance. You can currently save up to £3,600 per year tax free. In a taxable account paying 3% AER a basic rate tax payer would normally earn £86, and a higher rate taxpayer just £65, after tax. But stashed in an ISA they'd both earn the full £108. And ISAs do not need to be declared on tax returns. And even non-taxpayers should consider using their allowance wisely - after all, who knows what the future may hold and when you might become a taxpayer again. Do this every year and that extra interest will soon add up. And remember, you only get this £3,600 allowance once a year. Fail to use it and it will disappear come 6 April. 2. Use your spouse And while we're on savings, if you're a taxpayer but your partner isn't you can minimise the tax payable on any other savings, too. Assuming you trust each other, by transferring any income producing assets to his/her name you can utilise his or her personal allowance.
Your personal allowance is the amount of money you can earn before having to pay tax. Assuming your non-tax paying spouse is under 65 and the interest earned doesn't exceed £6,475 in the current tax year, that money could earn interest gross. And while you're at it, don't forget your kids. They also have a personal allowance, so make sure any interest they earn is paid tax-free, too. It's easy to do; simply submit a form R85 to any relevant providers and you'll receive gross interest. 3. Tax code Have you ever checked your tax code? That little number and letter combo, found on your pay slip is formed when you subtract your benefits from your personal allowance. Multiply it by ten and it effectively dictates the amount of your annual income that can be earned tax-free, with the rest being taxable. Worryingly, thousands of us are given the wrong tax code (or are left to fester with an emergency code) all the time, which accounts for some of the millions overpaid to the taxman each year. But there's an easy way to avoid this - simply work out your own tax code - and if you think it's wrong, let the tax office know! 4. Pension Pensions can be a great way to save for retirement, if for no other reason than you get 20% tax relief immediately on your contributions. Every £80 paid in by a basic rate/non taxpayer is boosted to £100, so it's like receiving that portion of your salary, tax free. Higher rate taxpayers benefit even more, receiving 20% tax relief immediately, while being able to claim a further 20% via their tax return. Of course, you can't touch it until you retire, and the tax man will take his share when you start to claim your pension income, but in the meantime you can build up a pretty impressive nest egg. Even better, many employers offer a company pension scheme to which they also contribute - so you could find that whatever you pay in (up to a certain amount) is matched! What's more, anyone can claim pension tax relief, including children and those not working. So a higher tax paying husband could contribute £2,880 to his non-tax paying wife's pension, which with tax relief would be boosted by a healthy £720 to £3,600. Not bad. 5. Inheritance tax Some call this the worst tax of all. After all, we pay tax all our lives - do the government really need to take more from us when we're dead? Essentially, if you die and your estate is worth £325,000 or more, inheritance tax will be payable on the excess. And this villain pinches a whopping 40% of this money. Now you may be thinking that your estate is worth nowhere near £325K, so you're probably safe, and for many of us this is true. But with years of runaway house price growth before the bubble burst, property values still mean an increasing number of us are finding £325K is not such a vast sum after all when you take all your assets into account. So how can you keep the wolf from the door? One simple way is to write a will. Get your solicitor to incorporate a little simple tax planning and you'll keep more of your hard earned dosh out of the government's sticky fingers. 6. Council Tax And finally, a tax we all pay that we probably don't think much about is Council tax. But errors are regularly made here too, with neighbours in identical properties often paying vastly differing bills according to when they purchased their home. So how do you find out? Well that's the best bit - you don't have to be an annoying busybody by asking directly, as you can find out online via the Council Tax valuation list. If you do find you're paying more than your neighbours, there's good news as you may be able to apply to have your band changed. Contact your local valuation office in England and Wales (if in Scotland you'll need to check with Scottish Assessors ). If you're successful you may even qualify to get all of your overpayments refunded. But beware, bands can go up as well as down! So there you have it, some simple ways to hack back the tax you pay so that you can hang onto more of your hard earned cash. More from lovemoney.com | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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