Secrets to lower your taxes
With less than two weeks remaining before the end of the tax year, we owe it to ourselves to get the full benefit from our tax breaks this year.
Fidelity International reveals that with the 2.5% increase to VAT and the proposed increase to National Insurance this year, a basic rate taxpayer could be paying out more than 43% in taxes on each pound earned.
Don't panic, there is still time before 5 April to use those valuable tax breaks and stash away some cash.
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Pensions
Investing in a pension fund is even more tax efficient than a cash ISA, and you have the potential to benefit from a wide range of options to suit your needs.
Did you know that if you are on a higher tax rate of 40%, you can get 40% tax relief on your pension contributions? Basically, with every £100 contribution you make, it will only cost you £60. However, this relief is only available to the amount of your income that is taxable at 40%. The balance of any contribution will still get tax relief but at the lower basic rate of 28%.
If you are a basic rate taxpayer you can benefit from pension contributions as well. Basic rate taxpayers get 20% tax relief on contributions.
Additionally, when you take your benefits at retirement you are able to withdraw up 25% of your pension as a tax-free lump sum.
Pensions are also exempt from capital gains tax, investment income tax and are very efficient Inheritance Tax planning vehicles.
Reclaim taxes
Many people in the UK overpay taxes throughout the financial year. Although this will most likely be returned to you, there are some instances where you will not receive your money whether it’s a miscalculation by the tax system or HMRC hasn’t informed you of a change.
This can often happen if you change jobs throughout the year or have more than one job. Quite often you may have been issued an emergency tax code or your employer is using the wrong one.
If you have overpaid taxes, HM Revenue & Customs (HMRC) allows you four years to reclaim that money. So you have one month to reclaim taxes from the 2006/2007 tax year.
Alternatively, if you have received a P800 stating that you have underpaid your taxes and you have been handed a hefty bill, there are ways around paying it.
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The HMRC has sent out additional bills to some of you who it thinks have underpaid taxes. The demand follows the botched introduction of new software which has left millions of bills in chaos. An expected 1.4 million of you have received letters demanding that you pay up.
Just because the HMRC send you a P800 calculation it doesn't mean that the figures are correct and there is a way of avoiding this payment.
Through no fault of your own you may have underpaid your taxes and the 'A19: Extra-Statutory Concession' means that the HMRC may have to forgo your tax money. The concession takes effect when the taxpayer 'could reasonably have believed that his or her tax affairs were in order'. There is no limit to the amount of money that can be written off under this concession.
Individual Savings Accounts (ISA)
With a number of lenders increasing ISA rates, you have most likely been hit by emails trying to encourage you to lock your money away.
An ISA allows you to put away up to £10,200 and earn tax-free interest on your cash. ISAs are tax free which means the cash you deposit is exempt from income and capital gains tax.
However, only £5,100 can be saved in cash and the rest can be spread across stock and shares ISAs.
Shockingly, a Nationwide study reveals that 95% of people did not know what their full ISA allowance is and over 50% do not take advantage of a cash ISA.
According to Nationwide, the average cash ISA rate is 2.27%. If you were to invest your full allowance of £5,100 this year, you could earn an annual tax-free income of £115.77.
If your money is languishing at a low rate, you may be better off by switching to a tax-free ISA such as the Halifax Direct ISA Reward Account which offers 3.0% AER and 3.20% AER for existing customers.
You don't have to be a particularly aggressive investor if you want to invest in the market. Legal & General has an attractive offer if you are considering an investment ISA where you could yield up to 7.4% tax-free if you were to invest your money for a year.
Inheritance tax
As part of the 2011 Budget, Chancellor George Osborne announced that those leaving 10% of their estate to charity would receive a 10% discount on inheritance tax.
Furthermore, there are other ways to lower inheritance taxes. If you live for seven years after making a gift, it will become a 'potentially exempt transfer' and will not be subject to IHT.
Every tax year you can give away £3000 of assets and they will not count towards your estate for inheritance tax.
Wedding and civil partnership gifts up to a certain amount are often exempt, as are small gifts up to £250.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
