FOOL'S EYE VIEW
Tax Tricks For 2006!

By Cliff D'Arcy
January 10, 2006

Although practically every person in Britain pays taxes of some form or another, most of us do so reluctantly. Indeed, as US Appeals Court Justice the Honourable Learned Hand once remarked:

"Courts have said there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible... nobody owes any public duty to pay more than the law demands."

Hence, although I'm prepared to pay all taxes that are legally required of me (because I see taxation as a kind of "glue" which bonds society together), I don't wish to pay a single penny more. Indeed, when arranging my finances for maximum gain, I take care to boost my wealth by avoiding taxes, wherever possible. Here are ten ways that you can do the same:

(Note that many of these points now work for same-sex couples who have registered as a couple under the terms of the recent Civil Partnership Act.)

1. Use your spouse's allowances

Let's say that you're a higher-rate taxpayer, which means that you pay 40% tax on your savings interest. So, pre-tax interest of £1,000 turns into just £600 after the taxman's had his share. Now let's assume that your spouse is a basic-rate taxpayer, so s/he loses only a fifth (20%) of any pre-tax savings interest to the taxman.

Thus, by transferring your savings into your spouse's name, s/he can earn an extra £200 in interest each year. If your spouse doesn't pay tax at all, s/he can claim the full £1,000 by completing a form R85 (available from banks and building societies). However, this must be a "gift without reservation", so you have to trust your spouse to behave sensibly with this capital!

Check out the ace accounts in our Savings centre!

2. Claim all tax allowances and tax credits

Everyone receives a personal tax-free allowance; the basic allowance is £4,895 in the 2005/06 tax year. However, there are extra allowances for people over 65, blind people, and married couples born before 6 April 1935 -- see this tax table.

Also, low-income workers and workers with children can claim certain Tax Credits, such as the Working Tax Credit and Child Tax Credit. Also, pensioners can claim three benefits -- Pension Credit, Housing Benefit and Council Tax Benefit -- by calling 0800 99 1234. To find out which benefits you can claim, visit independent advice website EntitledTo.

"There's nothing wrong with the younger generation that becoming taxpayers won't cure." - Dan Bennett

3. Earn tax-free savings interest

If you're paying tax on your savings interest, then you may be missing a trick. Anyone sixteen or over can open a special savings account which pays tax-free interest, known as a cash mini-ISA. You can deposit up to £3,000 per tax year into a cash-mini ISA, so a couple can stash away an impressive £6,000 a year between them. What's more, these accounts are heavily promoted by banks and building societies, so many pay high rates of interest -- aim to make, say, 5% a year.

Learn more in our Cash Mini-ISA centre!

4. Avoid tax on capital gains

Let's say that you bought some shares for £10,000 earlier this tax year and you sold them yesterday when they were worth £20,000, booking a gain of £10,000. The annual capital gains tax (CGT) allowance for this tax year is £8,500, which leaves a taxable gain of £1,500. The tax on this gain could be as high as 40%, or up to £600.

One way to avoid this tax bill is to sell some shares which have fallen in value since you bought them, as you can offset capital losses against capital gains. Hence, recording a loss of £1,500 would cancel out your gain, leaving you with no tax to pay. Alternatively, you can place a tax-free wrapper around your investments by investing inside a self-select shares ISA, which means no more capital gains tax or higher-rate tax on dividends. Also, you can sell shares to "crystallise" a gain, then get your spouse to buy them back (known as "bed and spousing", or buy them back inside an ISA ("bed and ISAing").

Be a smarter investor: visit our ISA centre!

5. Use tax-free childcare vouchers

The government allows employers to give their workers tax-free childcare vouchers worth £50 a week, or £2,600 a year. Because these vouchers are exempt from income tax and National Insurance contributions (NICs), they are worth between an extra £816 and £1,066 a year to employees.

For example, in return for £2,600 of vouchers each year, my wife gave up £2,600 of her salary. Since she avoids 40% tax and 1% NICs on these vouchers, this salary sacrifice effectively leaves Mrs D £1,066 a year better off. What's more, reduced employer NICs mean an annual saving of £300 for her employer, making childcare vouchers a win-win benefit!

"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?" - Peg Bracken

6. Pay more into your pension

My wife is a higher-rate taxpayer, which means that every extra pound she earns above her basic salary attracts tax of 40p, leaving her with just 60p in the pound. Each March, her company pays her a performance-related bonus, of which she would normally receive 60% after deductions. However, rather than pay even more tax, my spouse prefers to pay a big slice of her bonus into her pension scheme in the form of additional voluntary contributions (AVCs).

So, instead of getting 60p in her hand, she gets £1 invested in her pension fund. Mrs D is a patient investor, so she understands that, while she won't see the benefit of this money until she retires, it remains her money. What's more, from 6 April 2006, the limit on pension contributions is being increased to 100% of salary, up to a cap of £215,000. Hence, if she chooses to, from next tax year, my wife can put her entire bonus into her company pension, which will go a long way towards securing her retirement .

So, if you have a company, personal or stakeholder pension, why not contribute more money to it in order to reduce your taxable income and boost your retirement earnings?

Find a cheap pension in our Pensions centre!

7. Use Gift Aid to be more generous

When you hand over a pound coin to a charity collector, the charity only gets £1. However, if you give via Gift Aid, every pound is worth £1.28 to the charity, thanks to tax relief from the government. What's more, if you're a higher-rate taxpayer, you can reclaim a further 23p via your tax return, so every £1.28 donated costs you a mere 77p. Eureka!

Here's a sneaky way to give to charity without it costing you a penny!

8. Pay lower taxes when you spend

As I explained in this article, a leading think-tank predicted that the government would collect taxes totalling £455 billion in the 2004/05 tax year. Although almost three-fifths of this sum (57%) comes from income tax, NICs and company taxes, a fair slice of it is accounted for by taxes on spending, known as consumption taxes. For example, Valued Added Tax (VAT) pulled in an estimated £73 billion in 2004/05, or a sixth of the total tax take.

What's more, "sin taxes" are amazingly high: they account for more than four-fifths of the cost of cigarettes (82%); almost three-quarters of the price of car fuel (73%); nearly three-fifths of the cost of a bottle of spirits (59%); over half the price of a bottle of wine (52%); and almost three-tenths of the cost of a pint of beer (29%). Also, almost an eighth (12%) of all money staked on the National Lottery goes to the government, gifting it around £600 million a year. Hence, I'm cutting back on my bad habits by having a financial detox this month!

In addition, if you'd like to cut back on motoring taxes (£29 billion a year), read Ten Routes To Cheaper Motoring, and you can pay less Insurance Premium Tax by reading these tips on lowering the cost of your cover.

Prune your premiums with a visit to our Insurance centre!

9. Let your employer make you rich

As I explained in Terrific Ways To Invest, employers can offer discounted or even free shares to their workers. For example, your firm might invite you to join a Sharesave scheme -- also known as a Save As You Earn (SAYE) scheme -- or one of several different approved Share Incentive Plans (SIPs). These plans are a simple way to build up a lump sum over several years in a tax-efficient way, and often produce healthy returns, making them a no-brainer for most employees.

Buy and sell shares cheaply with an online stockbroker!

10. Avoid death taxes

Sadly, the taxman takes one final bite of your wealth when you die! That's because your entire estate (including your home, but after deducting any debts) is liable to Inheritance Tax (IHT) at 40%. The main allowance is a nil-rate band, which is £275,000 for the 2005/06 tax year, and any assets handed down your surviving spouse are excluded from IHT.

If your total assets are worth more than £275,000 (and over two million UK homes are worth more than this), it may pay to look into estate planning, trusts and Wills. Contact a member of the Society of Trust and Estate Practitioners for expert advice.

"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money" - Arthur Godfrey

Good luck with your tax avoidance!

More: Find better savings accounts, ISAs, pensions, insurance and share-dealing accounts today!