Using your allowances could be an effective way of increasing your income
It may be one of life's certainties, but you shouldn't pay more tax than you're required to.
Tax can erode the income from your assets, whether savings, stock market investments, or property. You're entitled to a range of tax allowances, and it makes sense to make the most of these to ensure you only pay the amount of tax you are required to.
Start by making the tax system work for you. With an ordinary savings account, any interest you earn is taxed at 20% if you're a basic-rate taxpayer, 40% if you're a higher-rate taxpayer and 45% if you're an additional-rate taxpayer.
Here are five tips for cutting your tax bill:
1. Make the most of tax-efficient ISAs
ISAs are subject to annual subscription allowances. For the tax year commencing 6 April 2013 the overall ISA subscription limit has increased by £240 to £11,520, of which up to £5,760 can be subscribed to a cash ISA with one provider. For those over 18 the remainder of the £11,520 can be invested in a Stocks and Shares ISA with either the same or another provider. Alternatively, the full £11,520 can be invested in a Stocks and Shares ISA with one provider.
You can subscribe up to these amounts any time during the tax year, but allowances cannot be carried forward to the following year.
2. Take out a pension
By saving for a pension, you're effectively being given tax back from the government. Pension planning can be very tax efficient, and stakeholder pensions can also provide an effective way of saving for grandchildren.
3. Consider your tax status
If you are married, or hold joint savings with a partner, and they pay less tax than you (or none at all), then you could consider transferring cash to an account in your partner's sole name. By doing this you need to remember that you are giving away the ownership of the funds. Interest on such an account can be paid gross if your partner's total income is less than their personal tax allowance.
4. Invest in National Savings
The Government backed National Savings and Investment scheme offers indexed linked and fixed interest savings certificates together with premium bonds - all of which are exempt from tax.
5. Reduce your Capital Gains Tax
When you sell or give away an asset which has gone up in value, you may be liable to pay Capital Gains Tax. Some assets, such as your main residence, are exempt. Moveable items such as jewellery, works of art or furniture are also exempt if the item is worth £6,000 or less.
Gains on disposing of other assets, such as a second home, stocks and shares or business assets, are not exempt. However, no tax will be payable if your net (after deducting losses) gains for a tax year are less than your annual allowance. The allowance for the 2013/14 tax year is £10,900. Your unused annual allowance cannot be carried forward to cover gains in future years.
Where capital gains are exposed to tax, the rate charged will depend on the level of your taxable income. Where the aggregate of your taxable income plus taxable gains amounts to less than the basic rate band, (£32,010 for 2013/14) you'll pay tax at 18% on those gains. If your taxable income aggregate, together with any gains, exceeds £32,010, your gains will be taxed at 28%.
If you don't usually complete a tax return, but wish to report gains or losses, contact your local Tax Office.
Using your CGT allowance effectively can be a very useful tool, especially if you currently pay income tax at the higher rate.
The value of tax treatment will depend on your individual circumstances and may be subject to change in the future.
The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets. You should aim to invest for at least five years.
Pensions are not normally accessible until retirement benefits are taken.
