Income Tax
Income tax was introduced in 1798 by William Pitt the Younger to help
pay for the Napoleonic wars. Although it was abolished in 1816 (the year
after the Battle of Waterloo) it was re-introduced in 1842 by Sir Robert
Peel to fund a growing budget deficit (sounds familiar!) and has been
with us ever since. We have to tell you it is most unlikely that they will
ever get rid of it now!
|
The potential for reducing your tax bill depends very much on whether you run your own business or not. Most people don’t, and if you are an ordinary employee or pensioner there is very little you can do to mitigate your income tax liability beyond the few available reliefs already promoted by the Government. However, with a bit of foresight and planning, you can still reduce your tax bill quite substantially by putting money into pensions and other tax free investments, especially if you pay tax at the higher rate. You should also make full use of all available allowances.
|
|
| Tax Data |
|
|
 |
|
Click on the links below to discover more
| Information Sheets |
|
Tax Tips |
|
|
|
 |
|
 |
|
|
|
Spouse transfers
If your spouse is on a lower rate of tax, consider transferring investments to him/her or putting them in joint names.
Watch your tax code
If your tax code is wrong you could end up paying too much PAYE so query any unusual items with the Revenue.
Employment expenses
Make sure you claim all allowable expenses such as mileage or professional subscriptions on your tax return.
Negligible value assets
If you own shares that are now worthless claim for their original cost against income tax.
Non-resident status
If you spend most of your time outside the UK make sure you don’t lose your non-resident status by coming back too often.
Salary sacrifice schemes
Talk to your employer about taking some of your salary as tax free benefits like childcare vouchers or higher expenses. |
|
 |
|
 |
Example
Harry earns £60,000 a year in his regular job and has savings of £50,000 which are currently sitting in a bank account earning 3% interest. He is 50 years old and pays £2,880 per year into a stakeholder pension and £3,600 per year into a cash ISA.
If he leaves things as they are his tax payments would be as follows:
Salary - £60,000
Interest - £1,500
Gross income - £61,500
Personal allowance - £6,475
Taxable income - £55,025
Income taxed at basic rate - £41,000 x 20% = £8,200
Income taxed at higher rate - £14,025 x 40% = £5,610
Total tax paid = £13,810
If he pays £25 per month to a registered charity, invests £10,000 of his capital in a personal pension, £20,000 in a VCT and an extra £1,500 in his cash ISA, his tax payments would fall as follows:
Salary - £60,000
Interest - £555
Total income - £60,555
Personal allowance - £6,475
Taxable income - £54,080
Income taxed at basic rate - £53,875 x 20% = £10,775
Income taxed at higher rate - £205 x 40% = £82
Less: VCT investment - £20,000 x 30% = £6,000
Total tax paid = £4,857
Harry has managed to reduce his tax payments by £8,953.
Of course, the tax relief on the lump sum pension contribution and on the VCT investment is a one-off, but he will also get tax relief on dividends paid by the VCT and will be exempt from capital gains tax when he disposes of his investment.
For the self-employed a whole new world opens up for tax planning. For the object of this exercise, being self employed is taken to mean any type of business entity, for example sole traders, partnerships and limited companies. Click on our Self Employment page to discover more about the various things you can do.
Give us a call if you would like us to work out a personal tax strategy for you.
