We don't usually consider our
tax affairs until we enter the annual run-up to the
end of the tax year on 5 April. Then we reflect on ways
in which we could have reduced our tax bills by taking
action earlier.
It is estimated that approximately three-quarters of
all taxpayers are paying more tax than they need to,
with many facing penalties for failing to meet Inland
Revenue deadlines or keeping the required records. (Source:
ICAEW 2001)
The tax offensive
Consult our checklist to see if you could take advantage
of any of these methods of saving tax.
- Individual Savings Accounts
(ISAs) allow you to invest up to £7,000 a year in
a tax-efficient wrapper. You can make investments
in cash (at the low-risk end of the scale), insurance,
or stocks and shares (at the high-risk end).
- Non-taxpayers should claim
back tax on bank and building society accounts and
could consider transferring their savings accounts
to non-taxpaying spouses. Complete Inland Revenue
form IR85 form to claim back this tax.
- Make sure you meet the self-assessment
deadlines and get your tax returns in on time.
- Use your capital gains tax
(CGT) allowance efficiently. For the 2001/2002 tax
year, the CGT threshold is £7,500. Any gains made
on top of that are taxable at 20% for basic-rate taxpayers
and 40% for those in the higher bracket.
- Consider your inheritance
tax planning requirements. IHT is charged on a deceased
person's estate worth more than £242,000. It is charged
at 40% of the total value of assets over and above
this threshold. Tax may also be payable on transfers
of assets made in a person's lifetime, although gifts
made more than seven years before a death are exempt.
- You're allowed to transfer
up to £3,000 a year to other people without paying
inheritance tax. You can carry this allowance forward
to the next year if you have not used it up in the
current year. You don't have to pay inheritance tax
on transfers between married couples, or on gifts
to charities. Any gifts made seven years or less before
your death, in excess of the allowances given above,
are subject to tax.
- It's vital to make a will.
If you don't, you won't be able to take advantage
of tax-exempt options, such as leaving money to charity.
- Are you fully funding your
pension? Amounts paid into approved pension funds
receive full tax relief at 22%. If you're a higher-rate
taxpayer, you must claim the additional 18% relief
on your tax return.
- Investing in exempt National
Savings Products may be a good idea if you pay tax.
- It's worth taking advantage
of any employee share plans on offer. New legislation
has been introduced allowing employers to give up
to £3,000-worth of free shares a year to employees,
without them having to pay tax and National Insurance.
- Investing your money offshore
in a tax haven is an efficient - and legitimate -
way of beating the UK taxman. Your investments in
these tax havens are tax-free and only become subject
to UK tax when you decide to bring the cash back onshore.
Offshore investments allow you to roll up your profits
so you can choose when to repatriate the proceeds
of your investments into the UK. In this way, you
can delay being hit with tax until you're in a lower
tax bracket, for example when you retire. You could
even avoid paying tax altogether if you choose to
retire abroad.
- Another offshore option is
to buy investments through an offshore insurance bond
offered by a life insurance company. These bonds combine
life insurance around investment funds and have tax
advantages (for example, UK investors in offshore
investment bonds are allowed to take 5% of their premium
every year as a tax deferral). This is useful if you're
currently a 40% taxpayer.
To find out how you could potentially reduce the
amount of tax that you pay, whether now or in the
future, please e-mail
or contact
us for further information.
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