Tax Planning is hugely important. Earning money and building wealth is one thing, one thing is for sure is you will need to pay tax on those earnings. The less tax you pay, the more money you will reap. At the end of the day, it’s better in your pocket than the taxman’s pocket. In our latest blog we look at legitimate ways to pay less tax.
Why Is It Important To Pay Less Tax?
Most people leave tax planning to the last minute. This means some people will miss ways to pay less tax, by not researching what they can and can’t include in their tax returns. There of course many legitimate ways savings can be made on what tax is owed to HMRC.
What Are The Main Taxes?
The main taxes we pay in the UK are:
Income Tax – Paid at between 0% and 45%, depending on your income level. Tax is also paid on interest, dividends, and savings.
Capital Gains Tax – This is paid between 10% and 28% on profits from investment gains. This also includes gains when you sell a property, other than your main home.
Inheritance Tax – The one tax we all love to hate. This is paid at 40% upon death. .
Ten Ways to Pay Less Tax
1) Income Tax Allowance
Everyone earning under £100l has a tax-free ‘Personal Allowance’. This is £12,500 each tax year. This includes pension income, income received from rent, and offshore bonds.
2) Personal Savings Allowance
Non or basic taxpayers and higher-rate taxpayers get a tax-free savings allowance. For non/basic rate taxpayers it is £1,00o per year. For higher-rate taxpayers, it is £500 per year.
3) Ensure Your Tax Code Is Correct
Your tax code tells your employer how much tax to take away from your salary. The default code to receive a personal allowance is 1250L. If your code is lower, e.g. 1150, your personal allowance will be lower and you will be paying too much tax. If your code is higher, you may not be paying enough tax.
4) Capital Gains Allowance
Everybody has an annual Capital Gains Allowance of £12,500. You can potentially sell taxable investments and then reinvest them to minimise the tax due for this year. Future gains could potentially fall within the allowance at a later date. Alternatively, you can transfer assets to a spouse for them to sell and fall within their allowance.
You can also plan the disposal of assets so they fall within different tax years, thus benefiting from your annual allowance each year.
5) Employee Benefits / Work From Home
Research what perks are available to you with your employer, or the Government if you are self-employed. These may include:
- Electric car schemes.
- Cycle to work scheme.
- Tax relief on household costs and office equipment if you work from home.
- Company car tax relief.
- Pension contributions.
- Health and Medical Services.
For more information on work-from-home tax benefits click here.
6) Overseas Income
If you are benefiting from income overseas, check you are not paying tax twice. There may be a double taxation treaty available to you to offset the tax paid between different governments.
7) Are You Benefiting From The Most Suitable Employment Status?
Compare the tax benefits of being employed against self-employed. There are many advantages and disadvantages to both, depending on your individual status.
8) Marriage Tax Allowance
If you are in a Civil Partnership or married there are a number of ways you can pay less tax. You can potentially transfer 10% of your personal allowance to your spouse, or partner. There is also the option to backdate this for up to 3 years.
Couples can also benefit by paying less tax through capital gains, inheritance tax and receiving a pension after one person dies.
9) ISA Allowance
Each person has an ISA allowance of £20,000 per year. An ISA can hold assets, cash, stocks or shares so you can be creative with this to a certain degree. If you are using your ISA Allowance to invest in stocks and shares this protects it against Capital Gains and Dividend Tax.
If you are in a marriage or civil partnership, each person will benefit from the ISA allowance. This allows you to apportion assets to each ISA.
10) Dividend Allowance
Individuals are entitled to £2,000 dividends tax-free each year. If you are a company owner, it may be prudent to appoint your spouse or civil partner as a director. This will entitle them to the £2,000 dividend allowance.
If you would like advice on your tax affairs please contact us on 0800 802 1311.