Income Tax is a tax you pay on your income. You don’t have to pay tax on all types of income.
You pay tax on things like:
- money you earn from employment
- profits you make if you’re self-employed – including from services you sell through websites or apps
- some state benefits
- most pensions, including state pensions, company and personal pensions and retirement annuities
- interest on savings and pensioner bonds
- rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
- benefits you get from your job
- income from a trust
- dividends from company shares
So how can you pay less income tax?
Here are 10 suggestions…
- Pension
When you pay into a pension you get income tax relief on your contributions .
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
| 40% Tax Rate | 20% Tax Rate | |||||||
| Year | Pension | No Pension | % Diff | Year | Pension | No Pension | % Diff | |
| 1 | £10,700 | £6,252 | 71% | 1 | £10,700 | £8,336 | 28% | |
| 2 | £22,470 | £12,954 | 73% | 2 | £22,470 | £17,272 | 30% | |
| 3 | £35,395 | £20,131 | 76% | 3 | £35,395 | £26,841 | 32% | |
| 4 | £49,564 | £27,808 | 78% | 4 | £49,564 | £37,078 | 34% | |
| 5 | £65,077 | £36,013 | 81% | 5 | £65,077 | £48,017 | 36% | |
| 6 | £82,036 | £44,773 | 83% | 6 | £82,036 | £59,698 | 37% | |
| 7 | £100,555 | £54,119 | 86% | 7 | £100,555 | £72,158 | 39% | |
| 8 | £120,754 | £64,081 | 88% | 8 | £120,754 | £85,441 | 41% | |
| 9 | £142,761 | £74,692 | 91% | 9 | £142,761 | £99,590 | 43% | |
| 10 | £166,715 | £85,987 | 94% | 10 | £166,715 | £114,649 | 45% | |
| 11 | £192,765 | £98,000 | 97% | 11 | £192,765 | £130,667 | 48% | |
| 12 | £221,070 | £110,771 | 100% | 12 | £221,070 | £147,694 | 50% | |
| 13 | £251,801 | £124,337 | 103% | 13 | £251,801 | £165,782 | 52% | |
| 14 | £285,140 | £138,740 | 106% | 14 | £285,140 | £184,987 | 54% | |
| 15 | £321,285 | £154,024 | 109% | 15 | £321,285 | £205,365 | 56% | |
| 16 | £360,445 | £170,233 | 112% | 16 | £360,445 | £226,978 | 59% | |
| 17 | £402,846 | £187,416 | 115% | 17 | £402,846 | £249,888 | 61% | |
| 18 | £448,731 | £205,621 | 118% | 18 | £448,731 | £274,161 | 64% | |
| 19 | £498,358 | £224,901 | 122% | 19 | £498,358 | £299,868 | 66% | |
| 20 | £552,006 | £245,309 | 125% | 20 | £552,006 | £327,079 | 69% | |
Even when you consider:
- Your money is locked up till you are 55
- You pay tax when you take money out of the pension
- You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
2. ISA
Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched
Top 10 facts and rules…
- Its only available to ‘First Time Buyers’
- ‘First Time Buyers’ can only have one Help to Buy ISA with one provider
- You can pay in £1,000 when you open the account and then save a maximum of £200 per month
- The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
- The scheme will run for 4 years from the date it opens (Autumn 2015)
- Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
- Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
- You can withdraw funds but if its not to buy a home then you won’t get the bonus
- More than 100,000 homes have now been bought with government backed schemes
- You will be able to get them at banks and building societies
3. Salary Sacrifice
Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI
HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….
You (HMRC) may get requests for advice:
- on how to set up a salary sacrifice arrangement, or
- on whether draft documentation will achieve a successful salary sacrifice.
You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.
The specific updates are:
EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes
EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions
4. Employment Expenses
As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related
If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.
5. Dividends
When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.
6. Tax break for Couples
A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.
The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.
7. Tax Free Benefits
Getting tax free benefits will save you lots of tax, here some ideas…
- Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
- Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
- Mobile Phone – One per employee
- Lunch – Tax Free Lunch Blog
- Cycle Schemes – Cycle to Work Blog
- Fitness – Fitness Blog
- Parties and Gifts – Christmas Blog
- Parking – Parking Blog
- Business Mileage Allowance – 45p for the first 10,000 miles then 25p
- Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
- Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
- Suggestion Schemes – Suggestion Scheme Blog
- Insurance such and Death in Service and Income Protection – Medical Insurance Blog
- Travel Expenses – Travel Blog
- Working From Home – Working from Home Blog
8. Earn less than £100k
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.
9. Green Company Car
10. Check your P800
The P800’s are likely to contain errors because:
- Large amounts of data are manually input
- Estimates especially for Bank Interest and Investment Income
So check the following carefully:
- P60 – you get this at the end of each tax year
- P45 – you get this when you leave a job
- PAYE Coding Notice
- P11D Expenses and benefits
- P9D Expenses payments and income from which tax cannot be deducted
- Bank and Building society statements
- Pension Tax Deductions
Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.
steve@bicknells.net
