If the thought of upping sticks and moving to one of the world’s tax havens is a little extreme then you are likely to be one of the many who will face an ever increasing tax burden in years to come.
As this and future governments try to raise more money to help meet the UK’s record deficit it is taking measures to increase the amount it raises through various forms of tax. Not only have tax allowances and thresholds been frozen the new rate of 50% for the highest earners will take effect from April 2010.
The number of higher rate tax payers is predicted to rise from 3.49m in 2011/12 to 3.6m in 2015/2016.
At Investment Sense we believe that one of the main ways in which we can help our clients is to reduce the amount of tax they pay, whether it be on their income, their investments or from their estate on death, we are passionate about increasing wealth through reducing the tax burden.
In this article we set out some of the ways in which you could reduce the amount of tax you pay.
Take action now
Can you take income from your business now, possibly in the form of dividends, before the start of the new tax year? If so it is almost certain you will pay a lower rate of tax.
If you are employed can you get your employer to pay you early? It is possibly a long shot in these tough economic times and although you may pay less tax, you will certainly pay it sooner, but you might be surprised at your employer’s response.
Bring down earnings to below £100,000
From April the personal allowance, currently £6,475 will be reduced by £1 for every £2 of earnings over £100,000.
Therefore anyone earning over £113,000 will have no personal allowance.
One way to avoid this trap is to make pension contributions via the use of a salary sacrifice scheme in conjunction with your employer. Take an example of someone earning say £110,000 salary and contributing £10,000 into a company pension scheme. From April if they sacrificed that £10,000 in exchange for the company making the contribution they would bring their income down, furthermore they would save £150 in National Insurance contributions and their employer would save £1,280.
The company could direct its savings into the pension too to increase the benefit to the employee.
Hold savings in the name of the person with the lowest tax rate, simple but effective.
For example if you are a 40% tax payer but you or your wife is a 20% tax payer then he or she should hold the savings.
If you are a non tax payer make sure you complete an R85 form to have your interest paid without the deduction of tax.
Use your ISA allowances
Whether you are investing in a Stocks and Shares or a Cash ISA use your allowances.
If you are over 50 you can currently contribute up to £10,200 in total to an ISA in the current tax year with the maximum that can be paid into a Cash ISA being £5,100. For those under the age of 50 the limits are £7,200 overall and £3,600 into a Cash ISA.
From April 2010 the maximum for all is £10,200, including up to £5,200 into a Cash ISA.
Many people wait until the end of the tax year to fund their ISA, why wait? Get the benefit of the tax advantages early and fund your ISA for 2010/12 as soon as you can after 6th April 2010.
Use your CGT allowance
This is one that is often missed. Currently 18%, although expected to rise possibly to 25%, it is still lower than 40% or even 50% income tax. Furthermore the first £10,100 of gains in each year, per person, is tax free.
Therefore try and make investments which are subject to CGT and not income tax, clearly tax is only one consideration and the investment has to be right but nevertheless the tax treatment is still important.
If you require income then this could be met via a disposal of assets within the investment, rather than traditional dividend payments.
Furthermore for the moment CGT is still 18%, it is expected to rise so if you have gains whether they be in an investment or a property and you feel that now is the time to sell, it made it might be prudent to realise them before rates rise.
Use Child Trust Funds (CTFs)
Often not considered by investors, CTFs provide a return free from income and Capital Gains Tax, yes the amount you can contribution is low and the investment is held in the name of your child and can be accessed by them at 18 but if you are saving for your children’s future and you can trust them not to spend it all on fast cars and partying these are well worth considering.
Use National Savings
National Savings & Investments (NS & I) offer a range of tax free products paying various rates of interest.
To start with there is the standard Cash ISA which currently pays a pretty competitive 2.5%. The same rate is available on the Children’s Bonus Bond.
For those that want some protection against inflation, which has shown worrying signs of possibly increasing recently, take a look at the Index Linked Savings Certificates which currently pay 1% above the rate of inflation for both the three and five year termed Certificates.
The Fixed Interest Savings Certificates are currently paying 2.25% per annum if you are prepared to fix the rate you are receiving for five years.
Finally, love or loath them Premium Bonds are still tax free and have in the past paid attractive returns, although some would say that they are not what they once were.
Furthermore because NS & I are backed by the government your capital is 100% secure no matter how much you invest.
Make pension contributions
This is a traditional method of saving tax but still very worthwhile despite the restrictions to be imposed from April 2011 and anti forestalling rules which stop people making massive pension contributions before then.
Nevertheless the immediate tax relief available on pension contributions still makes this a very worthwhile exercise.
Balance ISA & Pension contributions
We have already seen how making a pension contribution can help generate immediate tax relief; however there is no getting away from the fact that in retirement the income generated is likely to be subject to income tax.
ISAs currently work in reverse, you get no immediate tax relief when you make a contribution however any money you take from the investment is free from income or capital gains tax.
A sensible combination of ISA and Pension investments can help to provide a tax efficient income in retirement. For example it is possible to fund pensions so that the income in retirement is within your personal allowance i.e. the amount you can earn without paying tax, currently set at £9,490 for the tax year starting 5th April 2010, remember a husband and wife both get the allowance, with further income generated from ISA investments, which will not be subject to tax.
As you can see there are many ways of reducing the tax you pay, many of these ideas work on conjunction with each other, it therefore helps if you have someone such as an IFA to help you see the bigger picture and open your eyes to the many tax saving opportunities available to you.
If you would like to discuss any of the ideas contained in this article in more depth please do not hesitate to contact us on 0115 933 8433 or 0845 074 7778, alternatively complete an online enquiry form by clicking the link below