The last couple of years have seen plenty of red faces all round, as the rich and famous have had their tax wheezes exposed, and undone by George Osborne. The weight of public opinion is that we should all be paying our fair share of taxes - but that doesn't mean you should pay more than your fair share. There are plenty of completely fair and legal ways to pay less tax, which we could all stand to take advantage of.
The income you make on savings accounts is automatically taxed at 20% (and if you are a higher rate taxpayer you have to top this up to 40% or 45% when you submit your tax return). However, you may not have to pay any tax on income from savings. If you do not earn enough to pay tax, you can complete form R85 - which your account provider will be able to send to you - so no tax is taken off the interest when it is paid to you.
Every year you also have a tax-free ISA allowance, and from 1 July this year it was £15,000. You can invest it in a cash ISA (like a tax free savings account with some limits), or a stocks and shares ISA (which lets you invest tax-efficiently in individual shares or funds). Alternatively you can split your allowance between the two. The stocks and shares ISAs have no capital gains tax when you buy and sell, and the tax on dividends is reduced for higher rate taxpayers.
Saving for a pension is very tax-efficient. Any money you put into your pension is tax free, and the government will refund the tax you've already paid on this chunk of your salary direct to your pension. It means that if you pay in £80, the government will top it up with another £20. If you pay 40% or 45% tax, you can claim the rest through self-assessment.
The pot then grows free of tax, and while there is tax when you take the money out at the other end, you will have benefited from the extra cash being invested, and the compound growth on that money.
Tax on childcare
The government offers tax-free childcare through your employer. The most common way the system works is that you agree to reduce your salary by a specific amount, and then have the equivalent sum given to you in the form of childcare vouchers.
The vouchers are free of tax and National Insurance, so if you give up £1,000 of salary you would normally only get £700 of that after tax and NI, with the vouchers you get the full £1,000. Basic rate taxpayers can get £243 of vouchers per month - but both parents can apply, which would mean saving £1,860 a year between you on childcare costs.
You can then spend the vouchers on any regulated childcare - including nurseries, after school clubs, child minders and au pairs.
Nobody wants to plan ahead for your own demise, but if you can bring yourself to do so in your 60s and 70s, then you can save your loved ones paying a huge bill after your death. If everything you own comes to more than £325,000 then everything over this will be subject to inheritance tax, so it's worth taking steps to avoid this.
It's worth pointing out that couples can transfer their allowance to one another. So when the first half of the couple dies, they can transfer all their belongings to their spouse, who will then have an allowance of £650,000 on their death.
If there's a risk you will break though this barrier you can also make gifts during your lifetime to get them out of your estate for tax purposes. You can give up to £3,000 a year which is tax free immediately. You can also give larger gifts, which will be counted as being out of your estate as long as you live for at least seven years after the gift is made.
One thing to be aware of is that you actually have to make the gift in order for it to count. So, for example, you cannot say you have given your property to your children if you continue to live in it: the tax man will rule that you haven't really given it away at all.
This seems like one of those taxes you are stuck with. However, if one member of the family earns considerably more than the other - or one of you is a non-earner, then there are ways to bring down the overall tax you pay.
The approach involves switching ownership of any income-producing assets into the name of the partner who doesn't pay tax. Once they have the shares, bank account, jointly-owned property, and investment funds, then the income will be taxed as theirs. It means they can take advantage of the tax free allowance on the first £10,000, and basic rate tax after that.
It's worth bearing in mind, however, that this only really works seamlessly for married couples, because for unmarried couples it can trigger a capital gains tax bill.
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