Reducing your Tax Bill
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 not much 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 employing the following techniques:
- put money into pensions and other tax free investments such as ISAs, EIS and VCTs
- make use of all available allowances, such as the annual capital gains tax exemption
- make use of all available losses from part-time self-employment or selling shares, etc
- split investment income, property income and capital gains between husband and wife
- explore salary sacrifice arrangements with your employer in exchange for tax free benefits
Click on the links above to discover more
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 - £7,475
Taxable income - £54,025
Income taxed at basic rate - £38,600 x 20% = £7,720
Income taxed at higher rate - £15,425 x 40% = £6,170
Total tax paid = £13,890
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 £1,740 in his cash ISA, his tax payments would fall as follows:
Salary - £60,000
Interest - £547
Total income - £60,547
Personal allowance - £7,475
Taxable income - £53,072
Income taxed at basic rate - £51,475 x 20% = £10,295
Income taxed at higher rate - £1,597 x 40% = £639
Less: VCT investment - £20,000 x 30% = £6,000
Total tax paid = £4,934
Harry has managed to reduce his tax payments by £8,956.
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.
