Avoiding tax is illegal, but there are perfectly legitimate ways that you can save on your tax bill.
1. Use your ISA allowance
At a time when savings accounts interest rates are at a low, paying tax on any interest that you do get can be exasperating. Whether you opt for the cash ISA or stocks and shares ISA savings account option, or a combination of the two, using your ISA allowance can help you make significant savings when it comes to UK Income Tax and Capital Gains Tax. You don't pay tax on any interest, dividends or profits received through an ISA savings option, so once you earn money on your capital, you know it's yours.
2. Save for retirement.
Pension contributions enjoy government tax relief so you can save on your tax bill and build up your pension fund at the same time. Employers will usually deduct pension contributions directly from your pay cheque before any income tax deductions, and personal pension funds will usually be refunded tax after contributions are made. So, for example, if you are a basic rate tax payer paying income tax at 20% and making contributions to a personal pension fund, for every £80 you put in, your pension fund could increase by £100.
3. Share your investments.
If your spouse is on a lower income than you, or not currently working, he or she may also be on a lower rate tax band when it comes to their personal tax allowance. You may want to consider transferring income producing assets such as investments into their name in order to use up their lower rate personal allowance. For example, if you are on a 40% tax higher rate band and your partner is on a 20% lower rate band your investment could effectively earn you up to 20% more in real terms.
4. Check your code.
It may seem like an obvious point to make, but it is always a good idea to check that your income is subject to the right tax code. It is often the case that individuals end up paying too much in income tax; make sure that you're not one of them. If you're on the wrong tax code, notify HMRC as soon as possible and start getting more for your money.
5. Inheritance tax planning.
We'd all like to think we're immortal, but for the human among us, planning ahead for the inevitable - that one last call from the taxman - is important, to ensure that our loved ones are protected from a mounting tax bill once we're gone. If you're approaching retirement you may like to think about making a will and winding down your assets through steps such as careful gifting, in order to reduce your inheritance tax bill.
There are also a range of other tax relief bonuses and tax credits that you can claim if, for example, you are self employed. Taking the time to research the possibilities can certainly pay off in the long run.
Saving on and reducing your tax bill, whether through cutting the Income Tax or the Capital Gains Tax (CGT) that you pay, can have the benefit of increasing your income in real terms, leaving you with more pennies for every pound. As the old saying goes, it's what you do with it that counts, and by following a few simple steps you too can save on your tax bill.
John Hughes writes for www.independentfinancialadvisor.co.uk, a UK based site that provides access to financial advisors as well as to debt advice charities for those struggling with their debts.
