FOOL'S EYE VIEW
Eight Ways To Hack Your Tax Bill

By Alison Hunt (TMFAlly)
August 23, 2005

Tax is a necessary evil that must be paid by all, to a greater or lesser extent. However, some people pay more than others, and this is all down to the way we manage our finances. Ever wondered why rich people seem to get richer? A lot of this is down to tax planning - they employ advisers to ensure they take advantage of every tax break going and thus hang onto every penny of their cash that they can.

Of course, most of us couldn't afford or want to pay for this kind of advice; after all we aren't potentially losing millions each year to the taxman. However, with a bit of foresight and understanding there are things we can all put in place to minimise our own tax bills. So if you want to hack back your tax bill, why not try these tips:

1. Work

The most obvious thing to ensure is that you're not paying too much income tax and that means checking your tax code. You can find out if your tax code is correct by using this Tax Code checker, and this Payslip Checker can allow you to see if you're paying the right amount of tax and National Insurance.

There are many perks for the taking in most companies but millions of us miss out every year, simply because we don't realise how lucrative they can be. Schemes such as Sharesave and Share Incentive Plans allow us to effectively buy shares in our companies at a discount and/or with tax incentives, and participation has caused many people to make handsome profits.

Additionally, your workplace could be just the place to turn should you need a new home computer if it is taking part in the Home Computing Initiative (HCI). This scheme effectively allows us to purchase computer equipment tax-free through our pay packet over three years, meaning a higher rate tax payer could gain £1,440 worth of computing equipment for just £850 from their net salary.

And remember that if you use a computer screen at work your employer must offer free eye tests and may even offer cash towards buying glasses.

Other benefits offered by employers include health insurance, life insurance, critical illness cover, dental insurance and income protection. Many of these may be included as part of your benefits package. However, even if they are offered as a taxable benefit (and you would consider paying for the cover anyway) it is usually worth taking as deals secured by companies are far more competitive than those obtained by individuals. Plus, you're actually only paying the tax.

2. Savings

Did you know that you could be cheating yourself out of extra interest on your savings each year, simply by keeping your cash in the wrong account? Higher rate taxpayers with £3,000 in a savings account paying 5%AER will actually only earn £90 interest over a year, after tax deductions. Move that cash into a mini-cash ISA paying the same interest rate however, and you'll earn £150. That's £60 extra simply for utilising the tax efficiency of your ISA allowance. What's more, you don't even have to mention your ISA holding in your tax return so you'll be making life easier for yourself, too. If you don't intend to invest more than £4,000 this year, consider using your mini-cash ISA allowance. And if you don't pay tax, ensure you have completed a form R85 for your bank accounts to prevent your interest from being taxed.

3. Pensions and Annuities

Pensions are regarded as tax-efficient vehicles. To encourage us to save for retirement the taxman will effectively give us back the income tax paid on our pension contributions in the form of tax relief and then charge us tax when we eventually draw an income from our pension. However, did you know that even those who do not work (and thus pay no income tax) are entitled to tax relief on payments into a stakeholder pension? If you are not working and you or your spouse can afford it, by investing up to £2,808 each year into your pension you will qualify for basic rate tax relief at 22%. This would boost your contribution by £792 to £3,600!

And although we all qualify for the basic rate tax relief at 22%, higher rate taxpayers can claim a further 18% via their tax returns.

When it comes to annuities, there are ways to maximise your tax efficiency here, too. Most personal and employer scheme pensions give us the opportunity to take 25% as a tax-free lump sum, to do with as we wish. The rest of our pension pot must be used to buy an annuity, paying us an income each year, which is taxed. However, by taking the lump sum and using it to buy an additional 'purchased annuity', a large part of the income generated from this would not be taxed, thus increasing your retirement income (the amount not taxed depends on your gender and your age when you buy the annuity)..

4. Working in Retirement

There are good and bad things regarding tax in retirement. The good things include the fact that once you reach State pension age, unlike your employer, you will no longer have to pay National Insurance. As that's currently payable at 11p in every pound earned between £94 and £630 each week and a penny on every pound above that, this could substantially affect your take home pay. To qualify, ask the Inland Revenue for a certificate of exemption to give to your employer.

Unfortunately, retirement does not protect you from income tax. However, when you turn 65, you qualify for an age-related personal allowance, increasing the amount you can earn each year before tax from £4,895 to £7,090 (2005/6). This would effectively save you £482.90 in tax in 2005/6 (if you had sufficient income to use this allowance). And for those aged 75 or over this allowance rises again to £7,220.

However, although this is all well and good, be warned, there is an income limit involved for those over 65, currently set at £19,500, which comes into play. Every pound that you earn over this income limit will totted up and half of this extra income will be knocked off your personal allowance. So, say you were a 66 year old earning £20,100. This is £600 more than your income limit of £19,500, so half of this, £300, will be knocked off your personal allowance, reducing it to £6,790.

5. Death

Did you know that when you die, anything in your estate (after deductions) worth over £275,000 (known as the nil-rate band) would be taxed at 40%? Yes, the money that has already been taxed once (by income tax) will be taxed again by Inheritance tax. That's potentially thousands of pounds that could disappear into the taxman's greedy hands! Of course, you could combat this by moving to a smaller home and spending as much of your cash as possible! However, if you would like to leave your money to your family but wish to protect them as much as possible from the dreaded IHT, you should write a tax efficient will - find out more in this article.

6. Charity

Although those coins we drop into those charity buckets that are shaken on the streets will be going to a good cause, did you realise that your money is actually worth more if you give in other ways? Thanks to Gift Aid, charities are allowed to claim back the basic rate income tax paid on any donations; meaning £78 from all taxpayers would automatically be boosted by £22 to £100. Additionally, a higher rate taxpayer could claim a further £18 by declaring the donation on his tax return. Ask your employer if it partakes in payroll giving, or alternatively, make sure you check the Gift Aid box when filling out forms to donate.

7. Council Tax

If you live alone, make sure you are claiming your 25% council tax rebate. You can also claim if you live only with children aged 18 or under. Additionally, if you believe your council tax band may be incorrect, you can appeal to your local authority.

8. Families

If you have a child (or children) eligible to claim the Child Trust fund voucher, make sure you save or invest it as soon as possible to maximise the interest earned. See if you're entitled to tax credits too. And if your employer offers it, consider taking part in the Childcare voucher scheme. This allows parents to sacrifice some of their salary for vouchers that can be used to pay for childcare. As the vouchers are purchased tax and National Insurance free, and both parents can buy the vouchers (should their firms offer them) this can save a fair amount of money in paying for childcare costs.

So there you have it, a number of ways to either check that you're not paying too much tax or take advantage of tax-free schemes. By participating in every scheme listed you could save hundreds, if not thousands of pounds each year in tax, so why not make the most of the ones you're eligible for?

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