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Well, here we are again.
The start of a new tax year is upon us, bringing with it many
opportunities to save tax (legally) and keep as much of your money in
your hands, and away from Gordon Brown's.
The budget was a bit of a damp squib, so let's look at some of the best ways to save tax!
Now, it's possible you've heard of some of these ideas, but are you
actually using them? I've heard many clients say they've heard of
something, then admit they've done nothing about it. Don't let this be
you...
On with the tips.
1. Use an offset mortgage to reduce the amount of tax you pay on your
deposit savings. If you have, say, £20,000 in a deposit account and
it's earning interest of 3% AER, the gross amount is £600. There's a
further £120 (20%) taken in income tax at source, plus another £120 tax
if you're a higher rate taxpayer. Therefore, the net interest is only
1.8%.
Now let's say you have a mortgage of £100,000 at 5% interest, meaning you're paying £5,000 pa to service the loan.
Now you place the £20,000 in an offset account, which means that you're now paying interest on £80,000, which is £4,000 pa.
Let's see what you've achieved. You WERE earning £360 pa interest on
the £20,000. Now you're saving £1,000 pa on the mortgage payment,
giving you a net gain of £640!
You would actually need another £36,000 in deposit savings to equal the
offset savings. The other plus is that you now don't have savings
interest to declare on your tax return.
2. If you don't want a flexible mortgage, or don't have a mortgage, you
can still save tax. If your spouse is not working and has no income you
should place the deposit savings in their name.
For example, if you have £50,000 in a deposit account and are paying
40% tax on this, you'll only be earning £900 pa on 3% gross interest.
If this is in the name of the non-earner you'll get another £600 in
interest. The non-earner can apply for the money to be paid gross by
completing form IR85, available from your tax office.
3. Linked to the above tip, you should also make sure you're getting
the best interest rate on any deposit savings. ING are currently paying
4.5% AER. So, if you duplicate the example above, you'd earn £2250 pa.
When compared to the original figure of £900 pa, this is an increase of
150%!
4. If you employ your spouse in your practice, there's a way in which
they can potentially qualify for a basic state pension, without paying
National Insurance. If you pay them less than £84 pw they don't qualify
for the pension. If you pay them more than £84 and less than £97 pw
they will qualify for basic state pension.
Any employment of a spouse must be done on a commercial basis and you
should qualify and confirm this with your accountant or the Department
of Work and Pensions.
5. Use the new pension rules to boost your retirement funds. For the
2006/07 tax year you can contribute up to £215,000 to your pension and
receive full tax relief, or 100% of your earnings if lower.
If you're self employed this is particularly useful to reduce your tax
bill. Remember, if you're a higher rate taxpayer you'll get 40% relief
on your contributions.
6. Buy Pension Term Assurance instead of 'normal' life assurance. If
you have, or are considering buying life cover, you can now get tax
relief on your contributions.
So, instead of paying £100 pm for protection, you may be able to get
the same level of cover for £60 pm. Over a 20 year term this amounts to
£9,600!
7. Observe what your accountant is doing for you. Is your accountant
simply following your orders and producing your accounts, or is he/she
proactively working with you to increase your profits by either helping
you to increase turnover or reduce costs? Ultimately, it's YOU who
signs off the accounts and YOU who the taxman will chase with any
queries, so make sure you're claiming for everything you should, and
not for items you shouldn't.
The Financial Tips Bottom Line:
Saving tax is really about being organised and working alongside the
right tax professionals over the long term. By structuring your affairs
to your advantage, it's possible you could give yourself a pay increase
without earning any more money.
Take the time to think how you can save more money and then take the necessary action!
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