There are ways to pay less tax without becoming either a tax evader or morally repugnant. Jimmy Carr, take note!
Smarting up on tax means you can keep more of your hard-earned income and boost your wealth for the future.
But should you be publically shamed like next Jimmy Carr for doing so? Probably not.
The comedian was criticised for his use of an offshore tax scheme to dodge paying tax on his income, something he has now rectified. Most people simply forget to claim what they’re entitled to.
It’s prudent to limit the tax you pay and maximise what you’re paid in relief. But for a bit of guidance, we’ve created a traffic light system for tax tricks that are A-OK, crafty or morally questionable.
Green – you’re good to go
Savings:
Maximise your ISA allowance and save up to £11,280 per person in a stocks and shares ISA, or up to half of that amount - £5,640 – in a cash ISA.
Unlike traditional savings accounts, the interest you earn in an ISA is free of tax. You can compare ISAs to find one with the right terms or which pays the highest rate of interest.
Pensions:
The more you pay into a pension, the more tax relief is added on top. This is because contributions are made from your after-tax income, so you’re paid the tax back on money used towards retirement savings.
Tax relief is automatically added at the basic rate of 20%, so when you pay £80 into your pension, the government adds another £20. If you’re a higher rate taxpayer, you can claim back more (at the rate you pay income tax) through self-assessment.
People don’t always take full advantage of this benefit, and according to unbiased.co.uk, four million workers who aren’t paying into a pension are missing out on £2.5 billion of income tax relief.
You can pay up to £50,000 a year into your pension savings and get tax relief. You can also carry forward any unused part of your annual allowance from the previous three years to the current tax year. When you to come to take an income from your pension pot, you will be hit by extra tax if you end up withdrawing a total pension income greater than £1.5 million.
Other allowances:
Make sure you claim any child tax credits or pension credits you’re eligible for and make efficient charity donations, which can be topped up by Gift Aid.
Consider putting your life insurance policy into trust, which means a pay-out could be free of inheritance tax and the money goes directly to the family members named on the policy. Also, check if you’re one of the thousands owed an inheritance tax rebate.
If you have children, you might want to consider childcare vouchers. You can sacrifice a portion of your salary before income tax or national insurance contributions are deducted to buy vouchers, which pay for childcare or out of school clubs and holiday schemes. But check how this might affect your eligibility for child tax credits first.
Amber – it’s shrewd, but beware of crackdowns
Becoming your own boss:
You can set up your own limited company to eliminate income tax and national insurance, paying just corporation tax at 20% instead - a highly effective method for high earners who would otherwise be paying 40% or 50%.
This is done by paying yourself a minimum monthly wage (below thresholds for income tax and National Insurance) and then topping up your income with dividends. Any business costs, such as using cars for work or your phone, can also be paid for by your own company.
This is legitimate if done correctly but there are some rules governing this grey area.
HMRC introduced ‘IR35’ over a decade ago to prevent employees leaving their job only to be re-employed in the same capacity but as a contractor. Instead of the employer paying a salary directly to the employee, a fee would be paid to the worker’s new company. This is regarded as evasion as opposed to a clever tax trick.
‘Flipping’ property:
This tactic was made infamous a few years ago when it was revealed that hundreds of MPs had flipped their homes, benefitting from Private Residence Relief.
By switching the home that’s nominated as your main residence, you can avoid or limit Capital Gains Tax on any profit from selling a second home.
It’s a legal loophole, but you will have to jump through some hoops to appease HMRC.
Red – it might be legal, doesn’t mean it’s right
Offshore schemes:
K2 – which until this month, many would have associated with a mountain in Asia – is an offshore scheme that reduced its clients’ tax rate to just 1%. This is the plan Jimmy Carr probably now wishes he’d never heard of.
Salaries are transferred into the trust, based in Jersey, which then lends money to its clients. The loan is free of income tax.
It’s legal but has been referred to as ‘morally repugnant’ and the government is now formally consulting on a General Anti-Avoidance Rule targeting ‘artificial and abusive tax avoidance.’
People who are non-domiciled in the UK can also avoid paying tax on interests held overseas, even if they reside in this country. Non-doms and the tax they do or don't pay is an area the government is constantly looking to squeeze, or at least says it is.
Avoiding stamp duty:
It’s not unheard of for house sellers to keep a property price artificially below the stamp duty threshold, while charging more for ‘fixtures and fittings’.
This would tempt first time buyers who wanted to avoid paying Stamp Duty, which starts at 1% of the transaction value for homes valued at £125,000, while sellers still receive the price they want for their home.
However, the rules changed a number of years ago and you have to complete a form with full details relating to the transaction.
The Revenue can also investigate a sale for up to nine months after the return form has been filed. If the sum paid for fixtures and fittings is large, HMRC could become suspicious and you could be lumped with a big tax bill.
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