You are a collection agent for the Inland Revenue. If you had no tax deducted from your investments or savings and then at the end of the year you were sent a tax bill of say £3,000 which you had a few weeks to pay you would no doubt take your taxation issues more seriously and move into action. Generally, because tax has normally already been collected from your savings before you receive it you probably take little or no notice. This is what the Government rely on.
Here are some tips to get you thinking and to take action:
Make sure you use up your £7,000 yearly Tax Free* ISA savings allowance. £3,000 annual gifting allowance .
You can make gifts to whoever you choose each year to reduce your inheritance tax bill.
You are allowed to carry over any unused allowance for 1 year. So if you did not make a gift last year, you can gift £6,000 this year. You can also give up to £250 to as many other people as you like.
If you are a non-taxpayer, including children, you pay tax on interest received from a Bank or Building Society account unless it is in a special tax free account.
Make sure you complete an R85 form to ensure that interest is paid with no income tax deducted.
If you have a joint savings account and one of you does not pay tax, talk to the bank or building society about only paying tax on the interest on half the amount or change the savings account into the name of the non-taxpayer only.
If you do not work, have children, grandchildren or are retired (below age 75) consider saving in a Stakeholder pension . These people can have invested for them up to a maximum of £2,808 this year by somebody else. With tax relief of 28p for every £1 saved, the government make this up to £1.28. If you invest the full allowance of £2,808 this gets tax relief of £792 worth making a pensions savings pot with tax relief of £3,600.
If you are a member of a company pension plan and earn below £30,000 and are not a Controlling Director, you can save up to £2,808 this year in a Stakeholder pension and claim tax relief even if you are a member of an Occupational Pension Scheme. For every £1 you put in the government will add 28p making it £1.28. Working people who wish to pay more than £2,808, make sure you use your annual pension contribution allowances, there is no facility to carry unused relief over to future years unless you have an older style pension.
Carry forward unused pension relief for up to 6 previous tax years. If you pay into older style retirement annuity policies (taken out before 1 June 1988), you can still pay in and claim previously unused tax relief from the last 6 years.
Childrens and adults savings allowance. A child or adult can receive up to £70 interest per year tax free from national savings ordinary savings accounts.
Why pay tax on interest? Parents can make gifts of money into children's savings accounts. Gross interest of up to £100 per parent is allowed to be received on the individual child's savings account which is not taxed as if it were the parents income. Gifts to children of money from anybody else other than parents e.g. grandparents. There is no limit on the amount of interest that can be paid which does not affect the income tax position of the person giving the money.
Each year use your annual Capital Gains Allowance of £7,500 (2002/2002). You can realise gains/profits of this amount and not pay up to 40% tax on the gain. Higher Rate Tax Payers. If you pay 40% income tax, you are able to obtain up to 40% tax relief on contributions that you make to pensions. This may make the £1 that you pay into a pension £1.66.
Higher Rate Tax Payers. You pay higher tax on income from savings interest, dividends, unit trusts and many others which is claimed via self assessment. Consider saving in Investment Bonds.
Income Tax can be deferred for up to 20 years. In 20 years you may not be a higher rate tax payer and may reduce or completely avoid paying tax at that time. Each person, including children, has a calendar year tax free friendly society allowance £270. You are allowed to save £25 per month or up to £270 as a lump sum in a Friendly Society Plan with no liability to tax. Parents can save on behalf of themselves and their children and save tax.
Over 50? Own a share in a business? Business Retirement Relief allowance (disposing of business assets and getting relief from capital gains tax) is reducing every year and being replaced by Business Taper Relief. The optimum time of getting a mix of the two reliefs is now upon us. If you are looking to pass your business on with the least tax liability consider it now. Business owners .
Pensions can buy and own business assets and property. Why does your business not use a pension fund? Tax relief can be claimed for what is paid into a pension and then it can buy assets. The pension fund pays not tax on gains or growth on the asset. It can even charge you and your business "rent" for the asset thus swelling your pension fund.
Put your life insurance policies in trust . Any benefits on death are paid out more quickly to the people you care about. Using trusts can also reduce an inheritance tax bill. Adding all your assets together including your home, are you worth more than £242,000? If you are then on death an Inheritance tax bill may be due. Adding a simple clause to your Will can save up to £96,800 in Inheritance Tax . This is called a Will Trust.
National Savings products. There are many types of National Savings Products to suit people of all ages whether children, working, not working or retired that pay no tax.
Venture Capital Trusts (VCTs). A person can invest up to £100,000 in Venture Capital Trusts which are generally high risk. When a person subscribes for new shares they will be entitled to 20% tax relief. Benefits - Capital Gains Tax deferral relief and the possibility of tax free dividends and no Capital Gains Tax on disposal of the shares.
Enterprise Investment Schemes (EIS). A person can invest up to £150,000 and receive 20% tax relief. Capital Gains Tax deferral relief may also be claimed and any gain after five years is totally tax free. These reliefs are available as long as the investment meets certain other criteria.
Finally, especially if you are retired or receive irregular income from pensions, bank and building society accounts and/or investments. Contact your local tax office to see if you are due a refund. You can even go back a number of years. The Inland Revenue will send you a short form to complete - it can't hurt!
* Tax Free means free of any liability for personal income or capital gains tax. Past performance is not a guide to future performance and the value of units can fall as well as rise. Charges also affect performance.
The above tips are our interpretation and understanding of taxation and law which is subject to change. The levels of and bases of, and relief from, taxation are also subject to change. If you withdraw from some investments in the early years you may not get back the full amount invested.
No advice is given, inferred or deemed to be given to any reader. If you are unsure, please contact us for advice on your own circumstances.