With the government struggling to balance its books, taxes look almost certain to rise in 2008. So, here are some tricks to trim your tax bill.
By the end of 2007, the UK economy had grown for 62 quarters in a row. In other words, our gross domestic product (GDP) has enjoyed a 15½-year winning streak that stretches back to 1992. No other major economy has enjoyed such an unbroken run in recent history.
However, while Britain has boomed, successive governments have failed to balance national spending against national income. In fact, governments have taken to borrowing increasing larger sums in order to plug these spending gaps. So, we've run up a huge overdraft during the good times, which leaves us with nothing to fall back on when the economy falters.
Hence, even though the government is trying to rein in public spending, I still expect taxes to rise this year. Indeed, the respected Institute for Fiscal Studies predicts that taxes will have to increase by at least £8 billion in the next tax year. I don't know about you, but I feel that I already contribute more than enough to our national coffers. Hence, I employ various (entirely legal) techniques to keep my taxes to a minimum. Here are some of the tax dodges which canny people employ to hang onto more of their money (in A-Z order):
1. Capital gains tax (CGT) allowance
When you make a profit from the sale of an asset, such as a shareholding or buy-to-let property, this usually attracts capital gains tax. (Note that you do not have to pay CGT on the sale of your main home.) However, each UK resident -- including children -- has a personal CGT allowance to offset against capital gains.
For the 2007/08, tax year, this allowance is £9,200, but you lose it if you don't use it before 6 April. So, be sure to bank some profits by `crystallising' some gains before the tax year ends.
2. Check your tax code
Each individual is entitled to a personal tax-free allowance, which is currently £5,225 for those under 65. However, your income-tax allowance is reduced by the value of `benefits in kind', such as a company car, company-paid private medical insurance and so on. As your personal circumstances can alter your tax code, it pays to ensure that it's correct. Also, HM Revenue & Customs (HMRC) often gets tax codes wrong, so check yours here.
3. Childcare vouchers
Working parents with young children know only too well how expensive childcare can be. Indeed, the Daycare Trust estimates that the average cost of a full-time nursery place for a child under two is over £8,000 a year. One way to reduce this cost is to sacrifice some of your salary in return for childcare vouchers from your employer.
These vouchers are free from income tax and National Insurance Contributions (NICs). For example, my wife claims the maximum tax-free amount of £55 a week, which saves her £1,195 a year.
4. Give via Gift Aid
When you throw £1 into a charity's collection bucket, that's all the charity gets. However, by making the same donation via Gift Aid, tax relief boosts the value of your gift to £1.28. What's more, higher-rate taxpayers can reclaim 18% of this sum via their tax returns, which is a saving of 23p for every pound handed over. Thus, thanks to Gift Aid, a gift of £1.28 to a good cause can cost just 77p.
5. Individual savings accounts (ISAs) for savers
Let's say that you have a bog-standard savings account which pays 5% a year before tax. After basic-rate tax of 20%, your return falls to 4% a year; higher-rate tax at 40% reduces this to a mere 3% a year. Thus, if you don't want the taxman seizing his share of your interest, then shelter your savings inside a tax-free cash ISA.
You can save up to £3,000 per tax year into a cash ISA, making these popular tax shelters ideal for savers aged sixteen or over. Even better, the upper limit rises to £3,600 from 6 April this year.
6. ISAs for investors
As well as having a cash ISA, you can have an ISA for investments, too. If you have opened a cash ISA this tax year, then you can contribute up to £4,000 into a stocks and shares ISA. However, if you're very keen on long-term investing in shares, then you can ignore cash ISAs and instead put up to £7,000 a year into a shares ISAs (£7,200 from 2008/09). My wife and I invest the maximum £7,000 each into shares ISAs every year and thus avoid paying income tax and capital gains tax on a slice of our shareholdings.
7. National Savings & Investments (NS&I)
NS&I, alias the government's piggybank, offers a range of tax-free savings products. These have proved very attractive to savers, particularly senior savers, as they are backed by HM Government and are therefore 100% secure. In total, it's possible to shelter a whopping £93,000 from tax by putting the maximum into NS&I's ISA, Premium Bonds, Index-linked Savings Certificates and Fixed-Interest Savings Certificates. Learn more about these accounts here.
8. Transferring assets between spouses
Let's say that we have a traditional couple where the husband works full time and earns, say, £50,000 a year, while his wife remains at home to look after their children and earns no wage. Now let's assume that they have £50,000 of savings which earn 6% a year before tax. Alas, all of these savings are in the husband's name, so he hands over £1,200 of his yearly £3,000 interest to HMRC.
Now let's do the sensible thing, which is to transfer the £50,000 of savings into the non-working wife's name. She has her own personal income-tax allowance, so she avoids paying any tax and therefore pockets the entire £3,000 in interest each year. So, simply by transferring ownership of assets between spouses, it's possible to save a tidy sum in tax -- £100 a month, in this example.
I'll leave you with a quote from Scottish whisky baron Sir Thomas Robert Dewar (1864-1930):
"Nothing hurts more than having to pay an income tax, unless it is not having to pay an income tax."
Or, as my friend Stuart once put it, "Don't complain about a big tax bill. You only pay when you're winning!"
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