In order to counter the inevitable tax rises, make sure you are not paying too much to tax to begin with. HM Revenue and Customs is unlikely to point out you are paying more tax than you need to. So we have put together the following tips to help ensure you are paying the right tax in the first place and protect your assets from further tax rises in the future.
Use your ISA allowance whenever possible
An incredible £144m* in tax could be avoided each year if investors and savers made full use of their ISA allowance. Savers can shelter up to £7,200 in a stocks and shares ISA (this is more tax-efficient if it is used for corporate bonds and other fixed-income investments). Alternatively you can put up to £3,600 a year into a cash ISA, with the balance going into the stocks and shares element.
The recent Budget raised ISA allowances for all in 2010 to £10,200. For those who are 50 or over this year can start to benefit from this increase from 6th October onwards. Make the most of any increase, especially with £175 billion of debt this year meaning taxes will rise for everyone for many years to come.
Invest in your pension
New pension rules were introduced in the recent budget, whilst it is not beneficial for some, there are tax efficiencies in certain circumstances. If you earn £100,000 - £150,000 then you should consider an investment, the tax relief could be as much as 61%.
Plan your Inheritance
If you have assets over £325,000 then you should plan your inheritance. Write a will, and use your annual allowance of £3,000. For those with larger estates it is worth seeking professional advice to protect your assets from the taxman.
Avoid paying unnecessary Income Tax & Capital Gains Tax
With the new 50% tax band capital gains are looking more attractive. You can realise £10,200 of gains in this tax year the 18% flat rate tax is applied. Make sure you use both your own and your spouses allowance If you crystalise a loss make sure you declare it to the Inland Revenue, that way you can carry it forward indefinitely.
Given that Capital Gains Tax is now charged at 18%, and higher rate income tax at 40% (soon to be 50%), many investors should look at realigning their portfolios, you could place income producing assets into your ISAs and capital growth assets outside, ensuring you not only use your capital gains allowance but when you do pay tax it is at 18%.
Venture Capital Trusts & Enterprise Investment Schemes
There are few investments left that offer you tax free income or tax relief on your investment. VCT’s will pay back 30% income tax relief on the investment. i.e. £7,000 invested becomes £10,000. There are however, risks involved (hence the tax relief) and the investment might not be for everyone.
In the recent budget EIS’s were the recipient of some good news, investors can make a carry back investment and claim tax relief for 2008-09. The relief is on income tax at 20%.
We will be going into a little more detail on both VCT’s and EIS’s soon.
Check your tax code
Mistakes can happen and if you don’t check they may go unspotted for years. If you think there is a problem contact your local tax office, or if you are Pay As You Earn (PAYE) liaise with your payroll department.
If you are over 65, check you have been awarded the higher personal allowance. In this tax year, most people can earn up to £6,475 before they pay tax. For those aged 65 to 74 this rises to £9,490, whilst those aged 75 or over on April 5 2009, the tax free allowance stands at £9,640.
Make the most of your personal tax allowances
If you are a non-taxpayer then make sure you sign an R85 form (available in bank branches) and get your interest paid gross. Additionally make sure savings are in the right name. If your spouse pays less tax it could benefit to move an investment into their name. This could reduce the tax your pay by half if you are a higher-rate and your spouse is a lower-rate taxpayer, or if a non tax payer this could be potentially to zero.
National Savings
There are wide range of investments available, offering low risk and tax-free returns. You lock your money in for 1,3 or 5 years for a tax free income. They also have index-linked products to help investors protect against inflation. You can view the full list on their website NS&I.
*ubiased.co.uk