• Top Tips for Saving Personal Tax! May 4, 2016
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    One of the most popular questions we are asked as tax advisers is how to save tax, and the response is always based on an individual’s personal circumstances. What works for one person may not always work for another (which is why you should be cautious of following advice given to a friend rather than to you). There are however a few things that more commonly apply to a wider range of people that you may be able to take advantage of, that don’t require you spending huge fees on more complex tax planning.

    File on time – this may seem like an obvious one, but many people incur unnecessary costs each year by missing a filing deadline. You then not only have a filing penalty, but potentially tax based penalties if you delay further and then interest on top. Burying your head in the sand just makes matters worse, and penalties & interest can soon spiral out of control.

    Check your tax code – HMRC often use your tax code to collect tax in year on things like benefits in kind. With the changes to dividends in 2016/17 we’ve already started seeing HMRC attempting to tax them during the year by adjusting tax codes, and the adjustments are often incorrect which will lead to you paying too much tax on your salary. Ask your accountant to check your code for you if it’s been adjusted, or tell HMRC directly why you think it’s wrong here: https://online.hmrc.gov.uk/shortforms/form/P2

    Payments on account – if you owe over £2,000 in tax & NI when you file your tax return then you will need to make payments on account, which are effectively payments in advance for the next year’s tax liability. If you think your income in that next year will be lower, make sure you claim to reduce your payments on account accordingly. This is a cashflow advantage rather than a tax saving, but could be a significant one.

    Childcare Vouchers – if you have children and incur childcare costs then you can save tax by being paid partly in childcare vouchers rather than salary. This can either be done via salary sacrifice, meaning you pay tax on a lower amount of income, or by your company directly contracting with the childcare provider (if you own your own company).

    Child benefit – if you or your partner earn over £50,000 you start to lose your child benefit, it being clawed back through your personal tax return. In order to mitigate this you can reduce your taxable income by using a salary sacrifice scheme for childcare vouchers, paying into your personal pension or donating to charity.

    Stocks & Shares ISA – From 06 April 2016 you can pay up to £15,240 into an ISA, and you can now chose whether this is stocks & shares, cash or a mixture of both, in any proportion you like. There is no Capital Gains Tax on the sale of investments held within an ISA, and no tax on dividends received.

    Transfer assets to your spouse – if you’re married or in a civil partnership thentransfers of assets between you are on a no gain/no loss basis for Capital Gains Tax purposes, so consider transferring assets to make full use of your joint allowances. For example, if you receive dividends from shares and have already used your £5,000 exemption then you could consider transferring these to your spouse if they have not used their full allowance. The same logic can be used to mitigate tax on other income bearing assets, or the sale of capital items on which CGT would otherwise be payable.

    Split Capital Gains – a simple way to save tax is to split the sale of any capital assets across two tax years where possible, thus gaining two CGT annual allowances. This can be effective for sales of shares and bonds, where it’s easy to sell part of your holding.

    Married Couples Allowance – If you’re married or in a civil partnership and your spouse doesn’t receive enough income to use up their personal allowance you can transfer £1,100 to you, potentially lowering your tax bill by £220. Both the donor and recipient must be non taxpayers or basic rate taxpayers. If the recipient spouse is a higher or additional rate taxpayer then they are not eligible. If you want to apply, you can do so online here: https://www.gov.uk/marriage-allowance

    Inheritance Tax & lifetime gifts – if the value of your Estate is over the IHT limit then there may be tax to pay when you die. You can limit this tax by careful planning and making a will, and also by taking full advantage of lifetime gift allowances. There is an annual exemption of £3,000 that can be given away, along with gifts to other individuals of up to £250 each per year. Additional amounts can be given to children (£5,000), grandchildren (£1,000) and others (£1,000) for their wedding or civil partnership. Finally there is an exemption for gifts from regular income such as life insurance policies or transfers to savings, provided the donor’s lifestyle is not compromised.

    Donate to charity - A qualifying charitable donation will increase your tax bands by 8/10 – so donate £100 to charity and your Basic Rate Band upper limit increases by £125 (being £100/8*10) from £32,000 to £32,125, meaning you save tax on that income as it will be taxed at 20% rather than 40% (or 7.5% rather than 32.5% if it’s dividend income). This has a knock on effect on the Higher & Additional rate bands too, so your Higher Rate Band upper limit becomes £150,125. The loss of your personal allowance at £100,000 can also be mitigated in this way, as donations will reduce your relevant income.

    Pay into a personal pension – this has the same effect as a charity donation, increasing your basic and higher rate tax bands meaning more income is taxed at lower rates of tax.

    Rent a room – do you rent out a room, or a floor of your home, to a lodger? If so, did you know that you have options for how you are taxed? You can use the rent a room scheme, which exempts up to £7,500 of income (up from £4,250 last year) but doesn’t allow any expenses to be offset, or you can ignore the scheme. If your income is over the limit and you have considerable expenses then it will save you tax to ignore the scheme and treat it as ordinary property income, completing the property pages of your tax return and claiming the expenses too. This second option also enable you to create a loss to carry forward against future rental profits.

    Get a good adviser – a good adviser will save you more money than they cost you, saving you both tax and time. You should be able to trust the advice they give you, and feel comfortable recommending them to others – if you don’t, why not? If it takes you hours every month to update their system, they aren’t proactive with the advice, they treat you as a number and they just don’t inspire trust –maybe it’s time to change.

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