Following the revelations of the Panama Papers and the naming and shaming of high profile celebrity tax avoiders, it’s good to know there are plenty of legitimate ways to save tax, if you act before the end of the tax year
With The End Of The Tax Year In Sight, It’s Time To Focus On Seven Separate Ways To Cut Your Tax Bill, Just As Parliament Intended
7 Ways To Legitimately Save Tax With HMRC's Blessing
Although HMRC is on the warpath to clampdown on tax avoidance, by understanding the workings of the various reliefs and allowances available, there are many ways to legitimately and honestly reduce your tax bill.
Tax 1. Make The Most Of Your Personal Allowance
If you’ve used your full personal allowance of £11,000 (2016/2017) and you have a spouse or civil partner who has insufficient income to fully use theirs, consider transferring assets that produce income to them, to reduce your tax bill. Depending on your highest rate of Income Tax, the savings can run to hundreds or even thousands of pounds.
If you’re a higher income earner, you should try and reduce your taxable income below the thresholds at which Income Tax is raised (ie £100,000 and £150,000). By way of example, the personal allowance is reduced by £1 for every £2 of net income over £100,000, which increases the effective top rate of Income Tax to 60 per cent for income between £100,001 and £122,000.
It’s possible to reduce your taxable income by changing it into non-taxable forms, deferring income, making pension contributions, making payments to charity or giving income yielding assets to a spouse or civil partner with lower income.
Tax 2. Pensions Still Offer Considerable Tax Planning Opportunities
Make sure you’ve utilised the annual allowance for tax deductible contributions, currently set to a maximum of £40,000 (2016/17). If you have unused amounts from the previous three tax years and sufficient income in this tax year, it could well be worthwhile carrying them forward.
Annual allowance has been reduced significantly in recent years, so it could be a case of ‘buy now whilst stocks last’. Recent changes for high earners have seen annual allowance reduced from £40,000 to £10,000, and this includes those who are drawing benefits. It’s proposed to reduce this figure to £4,000 in the near future.
Everyone can contribute to a pension, even those with no income, and effectively obtain Income Tax relief at 20 per cent on the first £3,600. The contribution is paid net of tax at £2,880, and the pension provider claims the tax relief of £720 from HMRC for investment into your pension fund. It’s a useful thing to do for non-earning spouses or civil partners.
A quick reminder for those with large pension funds. The lifetime allowance reduced from £1.25 million to £1 million on 6 April 2016. There are two new protections available: Fixed Protection 2016; Individual Protection 2016. In addition, it's still possible to apply for Individual Protection 2014 if the application is made before 6 April 2017, protecting fund values up to £1.5 million.
Tax 3. Receive Your Investment Income Tax Free
As the first £5,000 of dividend income is tax free, if you’re a business owner or if you have a decent sized investment portfolio, you should ensure you make the most of this allowance.
Depending on your total income, you could earn some of your interest tax free: £1,000 for basic rate taxpayers and £500 for 40 per cent taxpayers.
The overall annual ISA limit is being increased from the current level of £15,240 (2016/2017) to £20,000 (2017/18), so consider transferring into ISAs as many of your taxable assets as is right for you. Interestingly, since ISAs were first introduced, there is now an ever-increasing number of ISA-millionaires who’ve effectively sheltered vast amounts of their wealth in this tax wrapper.
Tax 4. Tax Break On Larger Tax Efficient Investments
You can shelter significant sums of your money in qualifying tax efficient investments: up to £1m under the Enterprise Investment Scheme and £100,000 under the Seed Enterprise Investment Scheme. They attract Income Tax relief at 30 per cent and 50 per cent respectively. A carry back claim made for a 2016/17 investment would reduce your tax liabilities for 2015/16, accelerating tax relief. Disposals of these investments are also potentially free of Capital Gains Tax.
Investment into a qualifying Venture Capital Trust up to £200,000 attracts Income Tax relief at 30 per cent, with a potentially tax-free disposal.
Tax 5. Tax Saving Opportunities Around Employment Earnings
Although it’s proposed to limit the scope for ‘salary sacrifice’ whereby taxable salary is exchanged for non-taxable benefits for new arrangements from 6 April 2017 and for existing arrangements from 6 April 2018, it’ll still be possible to save Income Tax and National Insurance Contributions by exchanging salary for the following types of benefit: pensions and pensions advice; childcare; cycle to work schemes; company cars with CO2 ratings below 75 g/km; life assurance.
If you have a company, consider switching your car to one with lower emissions. If you benefit from receiving fuel for private use, consider whether fully reimbursing the cost to the company would be cheaper than paying the fuel scale charge, which is based on the car’s CO2 emissions.
Tax 6. Enjoy Tax Free Or Low Tax Capital Gains
The annual Capital Gains Tax exemption enables you to realise capital gains up to £11,100 (2016/2017). Having maximised your exemption, providing you repurchase the assets after 30 days, you won’t lose the tax benefit of the disposal.
If you dispose of qualifying businesses or business assets, entrepreneurs’ relief reduces tax on gains of up to £10m to just 10 per cent instead of the normal 20 per cent rate for higher rate taxpayers.
The new investors’ relief provides you with a lifetime limit of £10m for gains realised by individuals (other than employees) who subscribed for shares in unlisted or AIM-listed companies to be taxed at only 10 per cent instead of the normal 20 per cent rate for higher rate taxpayers. To qualify, these shares must be held for at least three years. Here are further details of this tax break.
Tax 7. Generate Tax Free Cash From A Spare Room
The annual ‘rent a room’ relief was increased from £4,250 to £7,500 from 6 April 2016, enabling you to generate a tax free income of around £144 each week by renting out a room in your home.
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Closing 1 February 2019
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