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How to pay less tax
 Keeping hold of your money...
If you make any money, the government shoves you in the creek once a year with it in your pockets, and all that don't get wet you can keep.” Will Rogers Taxes pay for health, education, our infrastructure and general running of the country, so you’re not allowed to whinge (too much) about paying them. That doesn’t mean to say that you have to pay any more than you need to. Britons waste billions of pounds every year paying too much tax. It’s not about tax evasion (which is illegal) but tax avoidance – big difference. Income tax There’s not much you can do about the tax on your salary (other than get tax credits). But there are a number of legal ways you can cut down your total tax bill.
Share some of your investments with your spouse so that you take advantage of both your CGT allowances. The Government lets married couples transfer shares and property between each other without making them pay CGT. There must be some trust involved as the transfer must be made as a 'gift without reservation' and the new owner has complete say over what happens to the investment. If you're paying tax on share dividends, transfer the shares to your spouse if they are in a lower tax bracket. This will reduce your overall tax bill as a couple. This only works if you’re married, or in a civil partnership, not if you’re co-habiting. In that case, the transfer will be deemed a gift to your partner made at current market value and you’ll have to shell out for CGT even if no money changed hands. Put investment property under joint ownership, adding the name of your spouse or partner. Because you both get to earn the annual allowance before you pay tax, you can make quite a bit. You can also offset losses you have made on investments against your CGT bill and you can carry forward losses to the next tax year. If you’re a business owner some of your assets may be liable for something called ‘taper relief’. This isn’t a cure for tapeworm, it simply means that the tax you pay on the gain is lower than 40%.
The rules for inheritance tax have lots of exemptions that are a great way to reduce your tax bill. The main one is for gifts, letting you (within limits) give away as much as you can while you’re still alive without paying tax.
ISAs are a great way to help reduce your tax bill. There are two different types – mini and maxi ISAs, which let you wrap assets worth up to £7,000 a year. Find our best buys Isas here.
Smart couples use the tax rules to keep their combined tax bill down. If one partner is a lower rate taxpayer, it makes sense to keep your savings in their name. For example, if you put £3,000 of savings in an account in their name paying 5%, you will make £117 per year in interest, as opposed to £103.50 from a joint account. If he or she is a non-resident taxpayer, you would make £150.
Venture Capital Trusts (VCT) are an investment company, which is listed on a stock exchange and offers savings on income tax. The tax break is pretty good – currently 40% even if you’re not in a high tax bracket. But, this tax incentive comes with a high degree of risk; VCTs have a poor reputation for making money and they have high management charges. You also have to keep the VCT for at least three years to get the benefit. Also 20% of this tax break is paid back into the investment fund and the other 20% is available through tax relief. In other words, you don’t just get given a nice fat cheque…sadly.
National Savings offers accounts called National Savings Certificates that pay interest tax-free. Like other bank savings accounts, they offer the guarantee of at least getting your money back. But the accounts are not particularly competitive, although they are pretty decent for higher rate taxpayers. Premium bonds are tax free, and offer the chance of winning oodles of money, but have a minimum investment of £100, maximum £30,000. Also, the likelihood of making much at all on them is getting lower every month, as more people pile and and the odds get longer. Friendly Societies were set up by local groups of people who pooled their money together to act like a bank for savings and loans. Everyone can hold one Friendly Society savings plan which is not taxable. However, Friendly Societies’ charges are quite high - about £2 per month - and their returns are traditionally quite poor. Everyone can hold one Friendly Society savings plan, which is not taxable, but the amount of money you can pay in each month is capped at £25. Make sure you make the most of any tax credits you’re entitled to. The whole tax credit system is pretty complicated, but it’s worth persisting because there’s money to be had. If you’re a non-taxpayer register to get gross interest on your bank and building society accounts by completing an R85 form from the bank. If your spouse is a non-taxpayer, or pays a lower rate of tax than you, transfer your money to their account and save up to 40 per cent in income tax. Want to know more? Check out our top tips for avoiding tax |
Jasmine and the Moneymagpie team
Moneymagpie Moneypedia
14.02.2008
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