Slash your tax bill - while you still can!

The new tax year is fast approaching - and ahead of the General Election, taxpayers should prepare for steep hikes. We show you how to keep more of your cash out of HMRC's hands.

UK taxpayers and investors are set to bear a heavy burden in the coming tax year. With a General Election fast approaching, taxpayers will suffer whichever party wins, as the next Government imposes swingeing measures to bring down a ballooning national deficit estimated to hit £178bn at the end of the current tax year.

The expected measures will come on top of heavy tax increases already announced. The coming 12 months will see the introduction a new 50% rate of income tax for high-earners on £150,000 or more a year - but the rest of us are set to suffer too. All personal tax-free allowances and tax bands are set to be frozen - meaning a hit in the pocket in real terms.

• Watch our video on Britain's most hated tax.

The measure continues a trend that has seen millions of us pay more in tax than ever before over the past decade. Nearly all tax thresholds - with the exception of Inheritance Tax - have risen in line with inflation, rather than earnings, dragging more taxpayers and investors into higher tax bands.

Fortunately, there is action you can take - and it could be surprisingly effective. Research from financial advisory body IFA Promotion, estimates that Britons will waste £9bn in avoidable tax payments over the coming 12 months, with the biggest sums lost through not claiming available tax credits and poor inheritance tax planning.

The survey also found that 86% of those questioned admit to doing nothing to reduce their tax burden. So join the smart minority and keep more of your hard-earned cash out of the taxman’s hands.

Know your tax limits

Each of us has a personal tax allowance - the amount we are allowed to earn before we have to start paying tax. For the 2010/11 tax year, the limit for basic rate taxpayers has been frozen at £6,475. For those aged 65-74 the allowance is a more generous £9,490. If you already pay tax at source or through Self Assessment, these limits should be automatically imposed - but check your return to ensure they are.

Make sure you arrange your income to take full advantage of your personal allowance, particularly if you’re marriedd. Couples have two personal allowances and so can receive the first £12,950 of their combined income tax-free.

Head to our tax tips section for help and consult an independent financial adviser for the best way to maximise your tax-free limits.

Know your tax code 

If you work for a company, your tax gets automatically deducted from your gross (before tax) income, according to your tax code - but the past year has seen a scandal in which millions of taxpayers have been allocated the wrong code. What’s more, taxpayers have been told by HMRC that they must work out for themselves if their code is correct.

Two key codes to watch out for are: BR, which signifies the imposition of an emergency tax code, meaning that you will be taxed on all of your income because your tax-free allowance has been taken away, and: DO, which means you will be taxed at the higher rate on all of your income.   

Fortunately, checking your tax code is fairly simple. Ask your local tax office for a coding notice to ensure you are on the right code.

Claim tax credits

Britain’s biggest tax wastage comes through unclaimed tax credits. According to IFA Promotion some £4bn is lost to the taxman. If you’re on a low income, you may qualify for child tax credit or working tax credit, so make sure you’re getting what you’re owed. Check the HMRC website for more information on how to claim.

Maximise your tax-free savings allowance

The best way to shelter your cash from HMRC’s reach is to make full use of your annual tax-free ISA allowance. All savings invested in ISAs - whether in cash or stock and shares - are free from savings tax, capital gains tax and don’t have to be declared on any tax return. The total ISA allowance will rise to £10,200 for everyone in the coming tax year, with a maximum of £5,100 available for cash savings.

Even though returns on cash ISAs are currently pretty paltry, with most paying returns below inflation, it’s still worth using your full allowance simply because you’ll escape any tax that reduces the sum in real terms. What’s more, you can always transfer any sums held into different ISAs paying a better rate of return once interest rates start to rise.  

Among the best buy ISAs currently on the market is the Santander Direct ISA 6, which pays 2.75% tax-free with no withdrawal limits.

Plan for Capital Gains Tax

If you have any investments (e.g. shares, rental income) that are not protected in an ISA, you could face a hefty Capital Gains Tax (CGT) bill of 18% when you cash them in. You can reduce the potential bill by making the most of your annual CGT allowance, which will be held at £10,100 in the coming tax year.

You can also further maximise your tax breaks by transferring assets between spouses - thus doubling your CGT allowance. Any profits you make from the sale of assets below the combined threshold of £20,200 will be tax-free.

Plan for Inheritance Tax

The taxman even wants a slice of your cash when you die! The only certain way to make sure your loved ones aren’t faced with an inheritance tax (IHT) bill is to plan ahead. To avoid the IHT levy of 40% above the nil-rate threshold of £325,000, it’s worth planning ahead and consulting an independent financial advisor. Making a will is essential and you can also reduce your total liability by giving “gifts” ahead of your death.

You can find out more about tax-free saving with our free ISA guides and watch our video for an introduction to stocks and shares ISAs. If you have any more questions about saving tax, ask the lovemoney.com community for help using our excellent Q&A forum.

More: How to slash your council tax bill | How to get a massive tax rebate