You may not realise it, but there are plenty of ways to legally reduce your tax bill, regardless of your employment or age. Below, we explain a few simple checks that can help increase your take-home earnings with a small amount of effort, and how to utilise tax reliefs and government schemes that are available to you.
In recent years, HSBC was struck by allegations that it helped some of its wealthiest clients avoid tax. But, for the rest of us who aren’t worth billions, is there any way that we can cut down our tax bills ethically?
Below we outline some ethical tactics you can use that will enable you to pay less tax in the future and the best ways you can ease your tax burden while keeping a clear conscience.
The basics
If you feel the need to consider your tax commitments, it’s worth taking some time to make sure you are paying the correct amount of tax in the first place.
Check you are on the correct tax code by either calling HMRC or looking at their website. You will need your most recent tax code, which can be found on your payslip or your P60, along with information regarding your earnings and savings before and after tax.
In addition to this, check you are getting all the tax credits you are entitled to. The tax credit calculator, also on the HMRC website, will help you work out your household income and whether you are eligible to claim both Child and Working Tax Credit.
The general amount you can claim from Working Tax Credit is £1,940, though what you may be entitled to depends on a broad range of factors including your family’s circumstances and general income.
In order to reduce your income tax, it’s worth considering a few simple ways to save tax on your earnings:
Check your tax code
This will collect from your salary and can be found on your payslip. Check your tax code each year or after changing jobs to make sure it’s correct for your situation. You can find out the most common ones in our guide to understanding your tax code. If you’re on the wrong code, you may be entitled to pay less tax in coming months or receive a refund for previous years.
Claim tax credits
Tax credits provide extra finances to those caring for children, disabled workers and those working on lower incomes. The two main types of tax you can claim are working tax credits and child tax credits. Do, however, consider that you can’t claim tax credits if you already receive Universal Credit.
Meet the tax return deadline
If you’re one of the 12 million people in the UK who need to submit a self-assessment tax return, be sure you don’t miss the deadline – this can be costly and is an easily-avoided mistake. For online submissions, you have until 31 January 2020 to send in your 2018-19 return. If you choose to file on paper, you’ll have to get it submitted by 31st October 2019. If you miss this deadline, there is an automatic £100 fine, even if you didn’t initially owe any tax.
ISAS and JISAS
It’s crucial that you make your savings as tax-efficient as possible and using an ISA is the simplest and arguably the best way to do this.
An Isa lets you put away thousands of pounds each year and avoid paying tax on the interest you earn. From 6th April, you will be able to save a maximum of £15,240 during the new tax year (2015/16) without HMRC being able to take a cut.
Significantly, the allowance is reset at the beginning of each tax year, so even if you’ve maxed out your allowance for the current year, you will automatically be able to put away the maximum amount in the next one.
If you have a young family, you may be interested in looking at a Junior Isa (Jisa), which works in just the same way as the adult Isa.
Put in place in 2011 as a replacement for Child Trust Funds, the allowance for the new tax year is £4,080. Children are unable to withdraw any money until they turn 18, so with this in mind, parents can grow a substantial nest egg for their kids before they reach adulthood.
Pension Relief
Making a contribution to your employer’s pension scheme (including any extra voluntary contributions you make) can be made from your gross pay, before tax is charged. The government will top up your pension with tax, giving you a no-fee bonus for saving for retirement.
It is crucial that you get your pension arrangements in order, as you can claim tax on private pension contributions worth up to 100% of your annual earnings.
If you are a basic-rate taxpayer and you are paying £8,000 into your pension fund, the government will increase this up to £10,000, due to tax relief of 20%, while a higher-rate taxpayer gets relief at 40% and an additional-rate taxpayer at 45%.
Your workplace scheme (an occupational pension) will involve your employer deducing your pension contributions from your salary prior to taxes being paid, so you get the benefit of tax relief instantly without having to take action.
If you are paying into a personal pension, this will come from your own taxed income, so your pension provider will claim 20% relief on your behalf, while higher-rate taxpayers can also claim a further 20% back either via their tax return or in writing to HMRC.
Are you married?
Marriage allowance is a taxation perk that is beneficial for couples where one partner earns less than than personal allowance. If you’re married or in a civil partnership, you can move any unused personal allowance from the less-earning partner to the higher earner.
Up to £1,250 can be transferred as of 2019-20, possibly saving you up to £250. To qualify, the higher earner must be a 20% taxpayer.
The government has opened registration for its Marriage Allowance; this serves as a tax break for the UK’s four million married couples and 15,000 civil partnerships that could see them save £212 annually.
Some married people already have a tax break through the married couple’s personal allowance. To be eligible for this, you or your partner needs to be born before April 1935 and how much you will receive is dependant on the income level of the claimant.
In an additional boost for older married couples, retirees will be able to pass on annuity income tax-free if they pass away before the age of 75 (currently where a joint annuity is placed, the survivor’s pension is taxed at a marginal rate). These changes will only be applicable when no payments have been made to the beneficiary before 6th April 2015.
Here at Barron & Co, we make it our priority to ensure that businesses that work with us retain their net profit as much as possible. Understand that there are essential tax contributions that must be paid, regardless of how much you’re earning. It can be a heavy burden for a company to calculate tax on top of handling payroll, but thankfully you don’t need to deal with this without professional assistance.
Here at Barron & Co, you local accountancy firm in Birmingham, we possess all the necessary expertise and experience to take the stress out of tax contributions and payroll; and we can save you money throughout this process.
Our accountants know the UK’s tax system inside out and they do this in accordance with all of the latest developments. We offer some of the best accountancy services in Birmingham, and can save your business thousands of pounds each year with our expertise and extensive knowledge. For more information about how we can help you make financially beneficial decisions, get in touch today.