It doesn’t matter whether you’re a seasoned employee or a fresh-faced apprentice; it’s always crushing to see how much tax has been taken from your monthly payslip. The looming spectre of the Taxman has even made it into popular culture, with both The Beatles and The Kinks once taking a swipe (although with the size of their bank accounts, they probably don’t miss the money as much!).
It’s a question we commonly receive from our customers – “How can I pay less tax?”. Well, we won’t go down the Marty Bird route (check out the fantastic Ozark on Netflix if you don’t know who he is) and will instead focus on some excellent methods that are on the right side of the law. Let’s take a look at some legitimate ways to reduce your personal tax bill.
1. Utilise your spouse’s outstanding Personal Income Tax Allowance
If your wife, husband or partner is not using their full allowance, there’s a great opportunity to make use of this. Of course, you’ll need to trust them (we should hope you do) as you’ll be transferring taxable assets over to them. For example, this might be in the form of a deposit account that was previously in your name, enabling them to take the interest. This also applies to shared dividends, property income and money received from investment funds.
2. Pay more into your pension
Ah the folly of youth, thinking we’ll never get old. That pension will be needed before you know it. The truth is, as well as helping to secure your future, paying into your pension is a great way to lower your tax bill. It can even help you to qualify for extra benefits. How so?
Take child benefit, for example. Typically, the more you earn over £50,000, the more you’ll see the payment gradually decline. Indeed, if you hit £60,000, it’s gone. Not so fast. Pension contributions can reduce your taxable income, taking you back down a bracket. Therefore, if you’re earning £60,000 and plough £10,000 into your pension, your taxable income will be back to £50,000. Now, you’ll get 40% tax relief on any earnings paid into your pension pot and should you have two littles ones running riot around the house, you’ll be entitled to a cool £1,788 in child benefit. That is a substantial difference.
As a side note, beware of withdrawing your pension pot early. It could land you with a rather hefty tax bill. Under the Pension Schemes Act 2015, individuals with a defined contribution pension will have the freedom to access their pot as they wish from the age of 55. You can take 25% of your pension tax free, however, depending on which option you choose, the remainder may qualify as taxable income.
3. Be nice and give to charity
Are you feeling charitable? Well, you might want to be. Charitable donations reduce your tax bill like pension contributions do. Donations made via the Gift Aid scheme offer instant tax relief at a rate of 20%. For those taxpayers on a higher rate, they can claim back the difference by submitting a self-assessment. Of course, upon submitting your claim at the end of the tax year, you’ll likely need to show a receipt or some kind of evidence to recoup that figure.
4. Cut out your National Insurance contributions
Hold your horses, this doesn’t apply to everybody. If you’re beyond the state pension age and still working, then you no longer have to pay Class One and Class Two National Insurance contributions. It could certainly help save you some money.
All you need to do is show your employer proof of your age (such as a passport or birth certificate) to stop these payments. If you’re not comfortable about your boss knowing your age, you can instead apply to HM Revenue & Customs (HMRC) to send them a letter instead.
5. Understand how you can make Capital Gains Tax work for you
Capital Gains Tax (CGT) is paid on profits taken having sold assets including property (not your main home) and investments. For the financial year of 20/21, the capital gains you can make before paying any tax comes in at £12,300.
Once you’ve exceeded this amount, the tax is charged according to your tax band. For basic rate taxpayers, you can expect to pay 10% (or 18% if it’s a residential property) while for the higher rate taxpayers, you’ll be charged 20% (or 28% if it’s a residential property). If you’re straddling the higher threshold when your gain is added to your income, you’ll be charged tax on some of that figure at 10% (or 18% if it’s a residential property) and the rest at 20% (again, 28% if it’s a residential property).
There’s a number of ways you can reduce the amount of Capital Gains Tax you pay. These include transferring assets to your spouse, using an ISA and making additional pension contributions. It’s worth bearing in mind that Capital Gains Tax could soon be raised as a result of the coronavirus pandemic, with the treasury seeking new ways to raise finances. The Office of Tax Simplification (OTS) has recently carried out a review and issued a report featuring 11 recommendations.
6. Make the most of your personal savings allowance
Did you know that you can potentially earn up to £1,000 in interest from savings without paying any tax? This comes under the Personal Savings Allowance (PSA) which is applied automatically and can reach that total for the basic rate taxpayer. Even those on the higher rate can still save up to £500 in interest without paying any tax.
The types of accounts covered by the Personal Savings Allowance include current accounts, fixed-rate bonds, credit unions, peer-to-peer platforms, corporate bonds and government bonds. However, let’s be honest, with the way interest rates are so low right now, you’d need a huge amount of savings (circa £40,000 plus) to get anywhere near exceeding the allowance for a basic rate taxpayer.
7. Be clever with your inheritance tax
Often declared as the UK’s “most hated tax”, Inheritance Tax is charged at an eye-watering 40% of the value of your estate that exceeds £325,000 (or £650,000 for those married, widowed or in a civil partnership). Yet the old adage, “Fail to prepare, prepare to fail” springs to mind here. If you are liable to pay inheritance tax but do your homework, you can reduce the amount you pay. How?
First of all, you can start to make a habit of gifting money to loved ones at values of up to £3,000 per annum. Furthermore, those charitable causes we mentioned earlier can also help a lot. By leaving 10% or more of your estate to charity, you can drive down your bill to 36%.
Should you be passing on your property to your children or grandchildren, make sure they’re aware of the nil-rate band, which is worth an extra £175,000. This is in addition to the existing threshold, therefore effectively taking the band to £500,000 for individuals and £1m for couples throughout the 2020/2021 financial year.
8. Deduct business expenses
You can also deduct business expenses before paying any income tax. This includes travel costs, the expense of running business premises (including working from home – particularly useful to know during the pandemic!) and stationery. Also, be sure to take a look at how you can take advantage of the Annual Investment Allowance. This allows you to claim tax back for capital expenditure on specific items. This mainly focuses on plant and machinery but doesn’t include cars. Count that Ferrari out then!
Tax affairs are complex and advice should be sought before making any decisions. However we hope this has helped identify opportunities to keep more of your hard earned cash.
Our experts at Cloud Accountant.com are well accomplished in this field and, as qualified professionals, can help you to find the right solution for you. Contact us today to discuss how we can help you.