FOOL'S EYE VIEW
How To Beat The Taxman - Forever!

By Cliff D'Arcy
September 30, 2003

Preparing my Tax Return is too difficult for a mathematician. It takes a philosopher. - Albert Einstein

Last weekend, I returned home after a fortnight's holiday in a fairly anxious mood. Not because I was due to return to work, but because there was a monster lurking in my home. This beast took the form of a SA100 form, otherwise known as a self-assessment Tax Return!

Note that today (30 September) is the final deadline to submit your Return if you want the taxman to calculate your tax for you. Alternatively, if you are prepared to calculate your tax yourself, you can file (and pay up) as late as 31 January 2004. My advice is to avoid going down this route, as it's a complete horror, even for the most mathematically minded.

Most people's income is taxed at source, in the form of 'Pay As You Earn' income, savings interest and share dividends. However, everyone who has taxable income paid without tax deducted, or is liable for higher-rate tax, must complete a Tax Return. Beware: this applies whether or not the Inland Revenue has sent you a form.

In previous years, I've completed my Tax Return in a couple of hours at most, but this year's was a nightmare. In total, I probably spent the best part of a day digging out my paperwork and completing the form itself. This ordeal would have been far more painful if I hadn't used TaxCalc.

(By the way, TaxCalc makes completing your Return much easier, plus it audits your Return, calculates your tax and allows you to print off your Return or file it electronically. It's available from our Fool Shop for £17.99, which includes a £2 discount and free postage and packing. I can't recommend it highly enough as, without it, I would never have completed my Return (and my wife's) in time to meet today's deadline. Anyway, because TaxCalc calculates your tax bill for you, you can delaying filing and paying up until the 31 January 2004 deadline, if you'd prefer. Plug over!)

All that work to find out that I owe less than - wait for it - a measly £7! Here are some lessons that I learned this week:

Don't build a paper mountain

I confess that I'm the world's worst filing clerk, because I lack the patience to file documents away neatly and keep good records. It took me hours of searching through boxes, bags and piles of paper to find the paperwork for my employment, state benefits, savings interest, share dividends and capital gains (profits and losses from trading shares).

No more! I solemnly vow that, from now on, I will follow in my wife's footsteps by creating a box file, into which I shall deposit all details of my earnings, as and when they arrive.

Don't delay - do it today

I promise that I will no longer wait until the last day of the deadline before filing my Return. Instead, I will follow my wife's example and do my Tax Return as soon as I have the final piece of paperwork needed to complete it. What's more, I will file my Return electronically, which will avoid wasting paper, plus it will be acknowledged immediately and my tax calculated automatically.

Reduce your earnings and your tax bill

You could reduce your taxable income (and your tax bill) by paying more into a company, personal or stakeholder pension, through one-off or regular contributions. For example, if you were paid £100, this becomes £78 after tax (£60 if you are a higher-rate taxpayer). However, put this £100 into your pension and it will grow tax-free until you retire.

Avoid paying tax on savings interest

Last Tax Year, I earned around £30 in taxable savings interest. To me, that's £30 too much, as it is taxed at 20% (40% for higher-rate taxpayers), which means that I lost £6 to the taxman. There's no need to pay tax on most savings, thanks to the wonderful tax-free cash mini-ISA, into which you can save up to £3,000 every Tax Year. Through saving in ISAs (and a TESSA that matures next year), I earned a tidy sum without paying tax.

Use your spouse's allowances

If you're paying tax on savings interest or share dividends, you can reduce your tax bill by transferring this capital to a lower-earning spouse. For example, if you are on a higher tax band than your spouse, you could put some (or all) of your savings and shares in his/her name, reducing your overall tax bill as a couple.

This concession only applies to husbands and wives, not live-in partners or same-sex couples. Furthermore, you must make a 'gift without reservation', so your other half can do whatever s/he likes with it...

Use your tax allowances and claim tax credits

Everyone gets a personal tax-free allowance, which is £4,615 for this and last Tax Year. 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.

Also, if you or your partner work and you have at least one child, you may be entitled to the Children's Tax Credit and the Working Families Tax Credit (from 6 April 2003, these mutated into the Child Tax Credit and Working Tax Credit).

Offset your capital losses against capital gains

If you have sold assets (such as shares) at a profit, you may be liable to the dreadfully complicated Capital Gains Tax (CGT), which can swallow up to 40% of your gain. However, everyone can make capital gains of up to £7,700 last Tax Year (£7,900 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 take your tax-free profit (called 'crystallising your gain').

Your losses are offset against your gains when your CGT bill is calculated, so if your gain exceeds the CGT allowance, it's often a good idea to take a loss on a poor-performing share in order to reduce your overall tax bill. I neglected to do this for my wife, which increased her tax bill by over £1,200 - ouch! (Note that if you sell shares and then buy them back within 30 days, this doesn't count as a disposal for CGT purposes.)

Another useful trick is to sell shares and then buy them back in a tax-free shares ISA, known as 'bed and ISAing'. Alternatively, you could sell your shares and have your spouse buy them back at the same time. This means that, between you, you keep both your profit and your shares. This is called 'bed and spousing' and has nothing to do with wife swapping!

When working out your gains, you need to take account of the cost of buying and selling your shares (your stockbroker's commission, plus 0.5% stamp duty on purchase), as these expenses can be used to reduce your gain and, therefore, your CGT bill.

I leave you with one final quote from one of the world's most eminent economists:

The avoidance of taxes is the only intellectual pursuit that still carries any reward. - J M Keynes

More: Cash mini-ISAs | Shares ISAs | Tax Centre.