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10 tips to cut your tax bill By Rachel Williams
While we all hate paying tax, the vast majority of us are paying far more than we actually need. We also fail to make the most of tax relief when we save and invest. Tax planning may not be a laugh-a-minute Here are our top 10 tips for cutting your tax bill and cashing in on tax relief: Always file your tax return well ahead of the 31 January deadline - miss the deadline and you'll be hit with a £100 fine. You may also be liable to pay interest on your outstanding bill. An estimated 10% of tax codes are incorrect, so check yours is at the right level with your local tax office. Make the most of your individual savings account (ISA) allowance and watch your savings and investments grow tax-free. Each year you can invest £7,000 tax-free (with a maximum of £3,000 in cash). Had you invested your full allowance in stocks and shares since ISAs were introduced in April 1999 you would now have a nest egg worth more than £83,000 (Lipper). If you or your spouse does not pay tax, ensure the Inland Revenue knows. You need to complete form R85 to prevent tax being automatically deducted from any savings accounts. This could save more than 6.2 million savers an average of £51 each, according to IFA Promotion. By transferring investments to a non-taxpaying spouse - this could save you 40% tax on investment income. If you have large savings consider an offset mortgage. By offsetting your savings against your mortgage you won't earn any interest that will be liable to tax, instead you reduce the interest payable on your mortgage. This is particularly beneficial to higher rate taxpayers who see 40% of their interest disappear in tax. Cash in on pensions tax relief. It costs basic rate taxpayers 78p to invest £1 in a pension while higher rate tax payers only need to pay 60p. Following the introduction of new rules last year, it's possible to invest 100% of your earnings subject to a £215,000 maximum. If you have children with a child trust fund make sure take full advantage of it before setting up other investments. Each year you can invest up to £1,200 tax-free. If you are married/have a civil partner and are looking at a hefty inheritance tax liability consider passing an amount equal to the nil rate band (£285,000 currently rising to £300,000 for the 2007/08 tax year) to your children rather than your spouse. As transfers between spouses are tax-free, this little trick ensures you take advantage of both your allowances saving your family 40% of the nil rate band - £120,000 for the new tax year. Remember to take advantage of your capital gains tax allowance - currently £8,800. If gains are realised either side of 5 April a married couple/civil partners can make up to £35,200 of tax-free capital gains (based on current allowances).
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