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FOOL'S EYE VIEW
'In this world nothing is certain but death and taxes'. So goes the famous quote from Benjamin Franklin. Indeed he was correct, but did you know that we waste almost £6 billion each year in unnecessary tax? Though most of us admit to resenting paying tax, very few of us are doing anything to cut our tax bills. But when you consider how easy it is to shield money from the taxman, why are we letting this happen? Try following these ten tax-planning tips and you may find yourself hanging on to more of your money - and keep it away from the taxman's greedy grasp! 1. Income Tax and National Insurance How much are you paying in income tax? Check your tax code using this Tax Code Checker, and the amount of tax and National Insurance you pay using this Payslip Checker. If you're paying too much - apply for a rebate! In addition, taking advantage of fringe benefits such as a company car could be a tax-efficient way of effectively being paid more, without a salary increase – use this calculator to work out what a company car would be worth to you (remember, that roughly the smaller the car, the less tax you'll have to pay). 2. ISA Allowance Cash Everyone over sixteen can save up to £3,000, tax-free, in a mini-cash ISA Currently, you can earn up to 5.4% AER – this would provide you with £162 interest (on the full £3,000) over a year. You'd need to earn 6.9% in a savings account for that kind of return, or 9% if you're a higher rate taxpayer, so make the most of your ISA allowance! Shares In addition to the £3,000 allowance for a mini-cash ISA, you can also invest £3,000 (£4,000 from 6th April 2005) into the stock market via a mini-share ISA. Or you could ditch the mini ISA route and take out a maxi-share ISA, where you can invest up to £7k. For a less complicated stock market investment, why not invest monthly into a cheap index tracker fund? Investing £100 a month for 20 years (with a 10% return) would make you over £72,000 – and the best bit is you wouldn't even need to declare it on your tax return! Check out our ISA centre to learn more about ISAs. 3. Pension Probably the most tax-efficient shelter for your money is a pension - especially lucrative if your employer contributes money to it on your behalf. For every £78 you pay in, the taxman will give you an extra £22 for nothing; higher rate taxpayers can claim back a further £18 via their tax return (that's £100 for only £60 cost!). Even non-taxpayers taking out a pension will receive a basic rate tax top-up – putting in a maximum £2,808 each tax year will attract a boost from the Government of £792, taking the total money invested up to £3,600. And, when you come to retire you'll be able to take 25% of that nice big pension fund as a tax-free, lump sum. Immediate Vesting Pensions (IVPs) can allow you to gain tax relief on a stakeholder pension, and then immediately withdraw 25% of your lump sum, tax free! You can find out more here. Most people are advised that 10-15% of your salary saved throughout your working life will (hopefully) provide a comfortable retirement. Popping any bonuses you receive from work will earn tax relief too, so you'll hang onto more of your money! To find out more, take a look at our Pension Centre. 4. Stamp Duty Boo, hiss - the tax we all love to hate – fundamentally because even though property prices have increased significantly over the past few years, the lowest Stamp Duty band has remained at £60,000 for almost twelve years. But you may be able to save money on Stamp Duty. There are rumours that the £60,000 limit could be raised in the forthcoming Budget, so moving house after April 5 may save you some tax. You also have to pay stamp duty (at 0.5%) whenever you buy shares. However, you can save here too, by buying Exchange Traded Funds or iShares which will allow you to buy shares (inside an ISA) without having to pay the evil tax! 5. National Savings You can invest tax-free in National Savings and Investments Premium Bonds, Children's Bonds or various savings certificates. In return for loaning the Government money, you are rewarded by receiving your interest tax-free (and in the case of Premium Bonds, by winning prizes). If you invested the maximum into all of these, £90,000 could be kept away from the taxman, or £93,000 if you get a cash ISA with them as well! 6. Capital Gains Tax (CGT) This is the tax that affects successful investors – everyone has a personal allowance and any gains made over that amount (currently £8,200) will be taxed! Only a small number of people pay CGT each year, but if you're a long-term investor it's something that could affect you when you want to cash up. You can avoid CGT by placing your investment into a mini or maxi-share ISA. You can also make use of your spouse's allowance as spousal transfers are free of tax. 7. Council Tax Probably our second most hated tax. Council tax, with its incessant increases, is slightly harder to save money on. You can claim a 25% discount if you live alone, and if you live with someone who is not your partner and cannot afford to pay, you can claim Second Adult Rebate. In addition, if you are on a low income, you may be able to claim Council Tax Benefit. 8. Inheritance Tax The 2004/5 threshold for Inheritance Tax is £263,000; your heirs must pay a whopping 40% tax on anything in your estate worth more than this. You may think this won't affect you, but when you realise your home is included it may change your mind! Use this calculator to work out how much Inheritance Tax you'll have to pay. If you will be affected by Inheritance Tax it may be worth paying a solicitor to prepare you a tax-efficient will. Married couples can utilise both of their personal thresholds and create a nil band trust. Other methods to avoid paying are to give property away, either directly, or by putting it into trust for at least seven years before your death. See our Guide to Wills for further information. 9. Savings Everyone in the UK may earn £4,895 before they pay any income tax. Therefore, where savings are concerned and you live with someone, you should consider both of your tax bands. For example, if one of you pays tax and the other doesn't (and you trust each other!), by placing your savings in the non-tax payer's name you can benefit from not paying any tax on your savings. By not carrying out this simple bit of tax planning, we're losing £128 million each year! Another £315 million is lost by non-tax payers forgetting to claim their tax back. Unless you fill out an R85 form, your bank or building society will automatically deduct 20% from any interest they pay you. Your bank or building society should be able to provide this form on request. You can find some great accounts paying +5% in our Savings Centre. 10. Employee Share Schemes Finally, if you are fortunate enough to be able to participate in an employee share scheme, do so! We apparently miss out on £158 million each year from not participating in these lucrative schemes where you can buy shares in your company (free of tax and NI liability), be given more shares by your employer and if you hang onto them for five years, avoid paying income tax and CGT on any profits made! You can find out exactly how they work in this article. So follow these steps to carry out some simple tax planning and hang onto more of your money!