One question that has proved ever more popular in today’s debt ridden society is how can we legally avoid paying tax? Of course, tax is inevitably unavoidable, as Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes”. However, there are ways that you can minimise the amount of money you are taxed, by the book. Obviously taking advice from a professional financial advisor is paramount here but to give you some ideas here are 6 easy steps to guide you on your way.
1. Make sure your affairs are in order in case of death: A will should ensure an orderly assignment of your assets. Get some good life insurance advice regarding trusts. A trust can help reduce your loved ones exposure to Inheritance Tax (IHT). All this comes from getting good financial advice before you die, as it is difficult to get it afterwards. The IHT limit is currently 325,000 in the UK, any excess amount over this amount is liable to 40% charge, and you can leave your assets to anyone in your will and won’t be taxed for a penny under the threshold.
2. Take advantage of a tax free savings account (ISA): Individual Savings Accounts, or ISAs, are a fantastic way of saving money that is not tax-deductable. If you are a regular saver and hold a standard savings account, it may be worth considering an ISA as you will currently be taxed on your savings. For the tax year of 2010/11, an ISA allows you to save up to 5,100 annually, although this is increasing to 5,340 for the 2011/12 tax year.
3. Tax relief on business mileage using your own car: It’s not commonly known that use of your personal vehicle for work can be claimed as tax expenses for business if your employer does not fully compensate you under HMRC guidelines. This will no doubt mostly apply to couriers and people who have to travel to different business sites regularly by car, van or motorbike, so look to see if you qualify for tax allowances for these journeys. First point of call for the right forms and to check if you qualify, HMRC.
The amount you can claim depends entirely on how much qualifying business mileage you make, how regularly you make it and what vehicle you drive. HM Revenue and Customs have a comprised list of ‘mileage rates’ for different vehicles which you can easily find online. When calculating exactly how much you can claim, you must determine how much your company pays in expenses and it is also important to recognise that simple commutes to and from the office are rarely classed as business mileage.
4. Fully use your capital gains tax (CGT) allowance: Do you own any assets, shares for example? Capital gains tax is the tax charged on the profits made by such assets. So for example, say you bought 20,000 shares in 1990 priced at 1 each but sold each of them in 2011 for 6, you would have an accumulated a hefty profit.
The only snag here is that the CGT allowance threshold (or ‘nil rate band’ to give it its official bureaucratic jargon title) is 10,100 for 2010/11, anything under or up to this amount in profit is tax free. The way around paying CGT is to sell assets in smaller chunks so they do not exceed the CGT barrier, reducing the amount that has to be paid.
5. Donate to charitable institutions: If you’ve heard of gift aid, this is what it applies to. Charities in the Britain are given preferential treatment, so are those who give frequently to charity. Minimum requirement is to be a basic rate taxpayer, this is where gift aid comes in, after charities take you donation (its money you’ve been paid, hence tax has already been taken) you can now reclaim the basic rate tax back from HMRC on the gross before tax was deducted.
If you fall into the high bands of tax, i.e. 40% or 50%, it’s possible to claim back the difference with the basic rate of tax (20% at the moment in the UK) on the gross value of the donation.
6. Rent out property? Expenses can be claimed! There are a number of expense landlords can claim against tax when looking at their property. If you have a residential let then it would more than likely be classified as a property business. A property business can make a number of expense claims for such things as repairs and maintenance of the property, cost associated with marketing and letting the property, interest on any loans associated with the property, Council Tax or other utility bills that are paid for by the landlord and any insurance costs. Claiming for these expense will reduce your tax liability.
Debi writes for Just Life Insurance the UK’s No1 website for Free Life Insurance Advice, Over 50′s Life Insurance, and market leading Life Insurance Quotes.
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