Paying huge taxes on your hard-earned money can be distressing. If you are an individual residing in the UK and are fed up with paying unnecessarily high taxes every year, this video is meant for you.
Do you know that our Government offers plenty of options in the form of tax reliefs and allowance that help minimization of tax?
What is a Tax Relief?
Tax relief is an initiative under the tax law to allow you to either pay less tax or get back the tax already paid in one way or the other. For instance, there is available tax relief on pensions.
What does Tax Allowance mean?
Tax allowance is the amount that you earn without being subject to tax. For instance, standard ‘Personal Allowance’ is available to every taxpayer.
All you need is to acquaint yourself with the knowledge of tax reliefs, allowances, and the investment choices to avail such relief/allowance that in turn help you pay less tax.
Let us now explore the top 10 tips for tax minimization.
1. Individual Savings Accounts – ISAs
If you are still stuck investing in a standard savings account, you can relate how even your nominal interest income has to undergo a considerable tax burden. It’s more like an inversely proportional relationship between your interest and tax due thereon.
So would you not want to invest in a tax-free saving scheme that allows you to invest up to £20,000 this tax year?
You heard that right.
It is possible with ISA – which can be opend by any individual aged 18 or more (16 for cash ISAs).
Unlike usual savings income, the interest and dividend income received under ISA will be exempt from income tax.
On the other hand, the sale/disposal of investment within an ISA is exempt from Capital Gains Tax.
ISAs are usually beneficial for additional rate taxpayers (not entitled to saving income nil rate band or whose saving income nil rate band is fully consumed).
If you are a high rate earner, you can save a mile through investment in ISAs !!
Personal pension schemes can be established by any individual.
Pension schemes might not offer much when it comes to figures, but the benefit drawn is worth the penny invested up to retirement.
Contributing to a pension can render you dual benefits. Through pension contribution, where you plan to save for retirement, you also get reasonable tax relief each year. The amount of tax relief depends on the rate slab – basic or higher.
Tax relief is available for pension contributions if the scheme is registered and the individual is below the age of 75 and UK resident.
An individual with no earnings can also obtain tax relief on gross contributions of up to £3,600 per annum.
3. Charitable giving
Charity never goes wasted. So if you are a UK taxpayer, a high earner, and a high-rate taxpayer, this exciting tax relief is meant for you.
If you are paying tax above the “basic rate” in a tax year, you can get a cut on your overall tax bills on account of donations or charitable giving. In simple words, you would get back the differential tax amount: the tax you pay and the tax (basic) applicable to donation.
You can reclaim this “basic tax-rate” adjustment in your tax return to reduce your overall tax liability.
For instance, if your earnings charge you tax at 40%, you get back 25p for every £1 gift-aided charitable donation through a tax relief mechanism.
Donate for the people and treat yourself with tax-free giving.
4. Enterprise Investment Scheme (EIS)
The UK government has introduced the EIS to boost up small early-phase investments into trustable UK companies by offering substantial tax relief to the investor.
If an individual disposes off any chargeable asset resulting in gain, and reinvests the sale/disposal proceeds in qualifying shares in an EIS, whole or part of such resulting gain can be eligible for tax relief.
To qualify for this tax relief, the individual must be UK resident at the time of gain acquired and at the time of reinvestment as well. Such reinvestment shall be in cash in an unquoted trading company operating primarily in the UK. The decision of reinvestment shall be taken within 04 years (from 12 months before to 36 months after the date the gain was made).
This income tax relief minimizes the tax burden of an individual significantly. For instance, an individual can get a lucrative income tax relief of 30% on the investment worth £1m in a particular tax year.
5. Seed Enterprise Re-Investment Relief – Exemption from CGT
The UK government also offers the tax relief to individuals via Seed Enterpise Investment Scheme (SEIS) which is also feasible for high-rate taxpayers.
In SEIS, some of the gain worked out on disposal of shares is exempt from capital gains tax. The remaining amount may be taxed in the usual way.
An individual may attain the maximum SEIS exemption upto 50% of the lower of:
• The actual amount of gain; or
• The reinvestment amount on which SEIS relief is claimed.
The maximum CGT exemption for any individual may be upto £50,000.
6. Salary sacrifice arrangement
Salary sacrifice arrangements are the agreements between an employer and employee wherein the employer reduce cash pay and instead offer some in-kind benefits to its employees. Most of these non-cash benefits open tax exemption room for the employees.
For any non-cash benefits, you need to work out the value of the perquisite in question. The non-cash-benefits under salary sacrifice arrangements may include:
• Tax-free Child Care scheme;
• Maternity allowance;
• Low emission cars;
• School fees;
• Workplace pension schemes.
Despite a radical downward shift on the prospects of tax avoidance on employment income over the period, the employees can still have a chance of tax-saving by opting for in-kind benefits (such as above) from the employer.
You would end up saving a handsome amount of tax through provisions agreed in salary sacrifice arrangement.
For instance, the basic rate taxpayer gets a tax exemption of £55 per week (£243 per month) for a Childcare voucher received from the employer during employment.
7. Personal Allowance (PA)
Every taxpayer individual is entitled to a PA which is currently fixed at £12,500.
Full PA is available even if an individual is only alive for a part of the tax year.
If PA is claimed in the most efficient way, it would result in considerable tax saving. The beneficial order of deduction in most of the cases will be:
• Non-savings income;
• Savings income;
• Dividend income.
This means the PA will be most beneficial if deducted from the non-savings income first, as savings and dividend income already offer low rate bands and allowance.
8. Marriage Allowance / Transfer of Un-used PA
Lucky, our Government pays heed to the idea of how a spouse or civil partners may help reduce each other’s burdens, be it tax burden, for instance.
The marriage allowance offered by the UK government is one such example.
Apart from being married or in a civil partnership, your income must lie below the tax threshold or Personal allowance threshold. On the other hand, your partner/spouse should be liable to pay tax at the basic-rate (before receiving this allowance).
If you choose to avail of marriage allowance, the law allows you to transfer £1,250 of your unused Personal Allowance to your partner. Your partner, in turn, gets a tax credit on this £1,250.
You would end up minimizing the cumulative tax liability of you and your partner through marriage allowance.
9. Check your tax code
How often do you bother verifying the tax code on your payslip? Well probably, you don’t.
Understand the tax code is a key that helps determine how much tax HMRC needs to deduct/collect on your salary income.
All you need to do is check the tax code every year, especially; when you change jobs during that particular tax year. You can easily find the tax code on your salary slip you get from your employer every month.
If your employer has applied an incorrect code, you should contact the tax office. By doing so, you would: either get the refund of extra tax paid/deducted or have it adjusted in the upcoming months to fine-tune the mistake. Easy?
10. Dividend income allowance
Dividend income is subject to tax at the rates specified by HMRC, as the top slice of income (after non-savings and savings income).
Currently, the dividend income up to £2,000 is tax-free. Unlike the savings starting rate and the savings income nil rate band, the dividend nil rate band is always applicable on the first £2,000. Regardless of how much income (other than dividend) you make, you will receive this tax-free benefit on your first £2,000 dividend income.
So isn’t this a great opportunity to low your investment tax bill?
P.S. No tax is paid on dividends from shares in an ISA.
On the other hand, married couples can make the most out of dividend tax allowance spreading their investment portfolios.
With a careful re-consideration of your investment choices and a little attention to tax planning, you would end up having a couple of tax saving available with you.