12 strategies to keep your tax liability to a legal minimum
Posted by siteadmin on Tuesday 22nd of September 2015.
Good planning and careful timing are critical if you want to maximise tax reliefs or minimise the tax bill on a transaction or investment, and avoid falling foul of the system of penalties and interest levied by HM Revenue & Customs (HMRC). With some preparation, you could arrange your financial affairs to minimise the impact of tax on you, your family and your business.
In this article, all references to married couples include registered civil partners.
1 Make sure your tax code is correct
Check the letter at the front of your tax code. For example, L is used for anyone getting the basic personal allowance; P is used for those aged between 65 and 74 getting the full personal allowance; Y for those aged 75 or over getting the full personal allowance; V is used for those aged between 65 and 74, eligible for the full personal allowance and the married couple’s allowance, who just pay basic-rate tax; K means you get no tax-free pay or owe money to HMRC.
The numbers on your tax code are worked out as follows. First, your tax allowances, any income you've not paid tax on – part-time earnings or untaxed interest – and any taxable employment benefits are added up. This figure is then taken away from the tax allowance and divided by 10. This is added to the relevant letter and becomes your tax code. If you're on the wrong code, you may be paying too much tax.
2 Take advantage of the New Individual Savings Account (NISA) allowance
Interest received on cash savings or gains from NISA investments are tax-free. Higher-rate taxpayers don't have to pay any further tax on dividends from investments either, and you don’t have to declare NISAs on your tax return. Also, there is no capital gains tax (CGT) to pay when you sell shares or units held in a NISA.
3 Invest in Junior NISAs for long-term savings
4 Save tax with pension contributions
5 Transfer assets to offer tax benefits
Complex rules apply but – if appropriate to your particular situation – this could provide benefits for income tax, capital gains tax and even inheritance tax. Transfers should be outright and unconditional.
6 Take advantage of age-related allowance eligibility
7 It's good to give
Gift Aid donations are regarded as having basic-rate tax (20%) deducted by the donor. If you are over 65, making donations to a charity through Gift Aid could reduce your taxable income to below the threshold at which you start to lose out on age-related allowances. If you are in a higher tax bracket, you can claim back the difference between the basic and higher rate of income tax on any Gift Aid donations.
8 Fully use your capital gains tax allowance
Capital gains tax is charged at 18% on your total taxable income and gains (up to £31,785) if you are a standard-rate taxpayer, and 28% if you pay tax at a higher rate (from £31,785).
9 Inheritance tax matters
Lifetime gifts are not normally counted as part of your estate for inheritance tax purposes if you live for seven years after making them. Lifetime transfers are either exempt, potentially exempt, or chargeable lifetime transfers.
10 Make effective use of trusts
11 Where there's a will, there's a way
12 Remove value from an estate
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