FOOL'S EYE VIEW
Eight Ways To Pay Less Tax

By Cliff D'Arcy
March 4, 2003

We're approaching the end of the 2002/03 Tax Year, which ends on 5 April 2003. That's just 23 working days away and, bearing in mind this Tax Year ends on a Saturday, you have until Friday, 4 April to organise your tax affairs to your advantage.

Thanks to increased public spending and lower tax revenues, it's likely that the Treasury's finances will become ever more stretched over the coming years. Therefore, if the government wishes to stay within its self-imposed borrowing limits, it's likely that our tax burden will have to increase.

So, if you want to hang on to as much of your wage and wealth as possible, it's in your best interests to arrange your affairs in order to minimise your tax bill. Here are our tips on keeping the chancellor's hands off your cash:

1. Claim all the Tax Credits and allowances you are entitled to
Everyone gets a personal tax-free allowance. However, if you (or your partner) are blind or disabled, or are married and were born before 6 April 1935, you are entitled to extra tax allowances. Learn more here.

Also, if you or your partner work and you have at least one child, you may be entitled to two valuable benefits: the Children's Tax Credit and the Working Families Tax Credit (from 6 April, these become the Child Tax Credit and Working Tax Credit).

Together, these can save you hundreds, even thousands, a year in tax so, if you work and have children, look into claiming both Tax Credits now.

2. Transfer your assets to a lower-earning spouse
If you are receiving interest on your savings or dividends from shares, these will form part of your taxable income. However, you can save tax by transferring these assets to a lower-earning spouse. For example, if you are a high earner but your wife only works part-time, you could put all your savings and shares in her name, reducing your overall tax bill as a couple.

Remember that this has to be a "gift without reservation", so your spouse can do whatever s/he likes with these assets. Hence, only do this if you trust your wife or husband to behave responsibly!

3. Make extra payments into your pension
My wife's employer pays its staff an annual bonus this month, just before the end of the Tax Year. Instead of getting walloped for even more tax, my wife pays a lump sum into her pension from this annual payment. Mrs D does this because she hangs on to her money and pays less tax (although she won't see the benefit of this pension money until she retires).

For example, if my wife took £100 in cash, this would be taxed down to £60 in her hand (£78 if she was a basic-rate taxpayer). However, she puts the full £100 goes into her pension, where it will grow tax-free until she retires.

So, if you have a company, personal or stakeholder pension, why not consider injecting more money into it to reduce your taxable income?

4. Use ISAs to pay less tax on your savings
Here at the Fool, we're big fans of ISAs - the tax-free wrappers that protect your cash or shares from being taxed. You can save up to £3,000 a year in a cash mini-ISA or, for long-term investing, you can shelter shares worth up to £7,000 from tax in a shares maxi-ISA.

With the basic rate of savings tax at 20% (40% for higher-rate taxpayers), you'll earn far more interest by stashing away your savings in a cash mini-ISA than you will in any other similar deposit account that is taxed.

If you already own shares and want to hang onto them for the long term, you could sell them and reinvest the proceeds - i.e. buy your shares back - in a self-select shares ISA. This means that any future growth will not be taxed.

5. Use your CGT allowance
When you sell assets such as shares at a profit, you become liable to Capital Gains Tax (CGT), which is charged at your highest marginal rate of tax (up to 40%). However, every UK adult is allowed to make capital gains of up to £7,700 this Tax Year without paying tax. So, if you have some shares showing healthy profits, you may wish to sell enough to use up your CGT allowance and pocket a gain of up to £7,700 tax-free.

However, if you want to hang on to your shares but "crystallise" this gain, you could sell your shares then buy some back in a shares mini- or maxi-ISA, called "bed andISAing".

Alternatively, you could sell your shares and have your spouse buy them back at the same time. This means that, you have both your profit and your shares between you. This is often called the "bed and spouse" technique.

Another wheeze is to sell your shares before 5 April then buy them back at least 30 days later (any sooner and this won't count as a disposal). However, you could lose out if the price has risen during your 30-day wait.

When working out your gains, remember to take into account the cost of buying and selling your shares (your stockbroker's commission, plus 0.5% stamp duty when buying), which will reduce your overall return.

6. Earn tax-free interest with an offset mortgage
If you owe £75,000 on your mortgage, you pay interest at your mortgage rate on, guess what, £75,000. Meanwhile, if you have savings of £15,000, you earn interest at a lower rate, which is also taxed at 20% or 40%. By combining the two in an offset account, you only pay mortgage interest on the difference - £60,000 - and get no interest on your savings.

This is a far better deal all round, as you don't pay tax and "earn" a higher rate of interest - see our 21st Century Mortgage Centre for more details.

7. Claim all your work-related expenses
If you have work-related expenses that your employer hasn't reimbursed, make sure you claim them back. If you are self-employed, don't forget to declare all your business expenses on your Tax Return.

8. Get your paperwork ready for your next Tax Return!
If you are due a Tax Return for this Tax Year, the Inland Revenue will send it to you on 6 April and it will arrive shortly afterwards. Put it in a folder, label it and keep it safe. Put all your paperwork as it arrives in your folder, including your P60 from your employer, dividend vouchers, "Certificates of Tax Deducted" from your savings bank, etc.  This will make your next Tax Return a lot easier to complete!

Finally, listen to the Inland Revenue in its own words, "We do not want you to pay any more tax than you have to" and do your best to keep your personal tax bill as low as possible.

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