5 Simple and Legitimate Ways to Make Tax Savings
Everyone has to pay tax on earnings and assets. But how do you make tax savings? When inflation rises or National Insurance contributions go up, so does your tax bill. Here’s the good news: if you abide by the rules but take time to do some financial forward planning, you can stop those bills getting completely out of control. Here are 10 ways you can make tax savings without upsetting the taxman, and legitimately not pay any more than you’re actually required to.
Make sure you claim all your allowable tax-deductible expenses
A good accountant will make you aware of what you can and can’t claim for but even the best accountant can’t walk around in your shoes 24/7. You must remember to give your accountant the information they need to calculate your tax bill. If you work from home for example, you can claim a proportion of mortgage interest, insurance, heating, lighting, water rates, council tax, business rates, and cleaning. If you need to run a vehicle for your business, you can claim mileage, petrol, vehicle tax, insurance, repairs and servicing, but you may not be able to claim the cost of buying that vehicle or claim for travel between your home and place of work.
Request a reduction on payments on account
If you’re self-employed, HMRC may ask you to make payments on account. It’s calculated by looking at your previous year’s tax bill. This means you’ll make two payments, one by 31st January and another by 31st July. It’s often regarded as paying off a proportion of your future tax bill. But as we all know, profits can fluctuate greatly year-to-year. If you expect to earn less in the coming year than you did during the previous year, you can apply to HMRC to reduce the amount demanded.
Keep it in the family
One of the simplest ways to make tax savings is to think and act like a family in life and business. Everyone in your family who is able to work has a standard personal allowance. At present, this is £11,200. If you earn an amount that puts you above the basic rate band for income tax, you can make tax savings by spreading income tax savings across your family. A good example of how to do this would be to employ your partner or child over 16 to do your business admin rather than doing it yourself. They would still have to make National Insurance contributions but there are two big benefits: their income up to the threshold would be tax-free for them, and it counts as one of your allowable business expenses.
Be generous—take advantage of your annual gift exemption
The current inheritance tax threshold is £325,000 per person, and £650,000 for a married couple. If your estate is worth more than £325,000, the remaining amount will be taxed at 40%. Reducing your future inheritance tax bill is surprisingly simple but you have to think practically about it. Many people avoid it for fear of seeming morbid. Others just don’t want to think about their own mortality or that of their parents. But if you take the long-term view and think practically, you can cut your inheritance tax bill. How? By giving an unconditional gift. Now, you do need to be careful if you’re considering making tax savings in this particular area. Remember this: a gift is defined as genuine, selfless and unconditional, which basically means you give without intending to get anything in return. School fees are a good example of a genuine gift. And if you make a large gift within seven years of dying, it will still be subject to inheritance tax. However, you can gift £3,000 per year inheritance-tax-free no matter what. Gifts to charities and political parties are also exempt from inheritance tax. And you can give as many recipients as you like £250 per year as a gift.
Make sure you maximise ISA savings and pensions
Many people also forget that ISA savings are one of the easiest ways to be more tax efficient. At the time this blog was written, the annual allowance for a cash, investment, innovative finance, or combination ISA was £15,240. The rules are slightly different for the Help to Buy ISA and of course they are subject to change, but the fact remains that an ISA allows you to earn tax-free interest on the entire balance every year. Paying into a pension is another simple way to reduce the amount of tax you pay.
Posted by admin on
29th March 2017
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