There are perhaps more ways than you might immediately think of to cut your tax bill, including making the most of tax free investments and reducing your capital gains tax liability. We take a look.
With many aspects of the Governments emergency budget hitting us from the next tax year, from 6 April 2011, now is a good time to consider hot to cut your tax bill.
The following are some points to consider, albeit you will need to assess your own particular needs and as appropriate seek detailed advice from a professional financial adviser.
1. Make the most of tax free investments
ISAs – The 2010-11 ISA allowance is £10,200 and you can either put the full amount into a stocks and shares ISA or half the amount, £5,200 in a Cash ISA. Interest or gains made are tax free.
Venture Capital Trusts (VCTs) – high risk investment in unquoted companies. You can get 30% tax relief given as a reduction in your income tax bill.
Enterprise investment Scheme – You can get 20% tax relief under this scheme if you invest over £500 in an unquoted company, as long as you hold the shares for more than 3 years. You can invest up to £500,000 and when you sell you shares they are Capital Gains Tax free or if you make a loss you can offset this against income.
2. Use Your Tax Free Allowances
Currently the personal allowance is £6,475 and this will increase to £7,475 in the next tax year, from 6 April 2011.
The higher rate (40%) income tax threshold will reduce from £37,400 to £34,900 in the next tax year, from 6 April 2011.
Make Use of Lower tax band – if you are a couple and one of you is a lower earner and on a lower tax band, make use of this with your savings. Put some savings in the name of the lower earner who perhaps qualifies for the 10% or 20% tax rate and thereby benefit from this rate for your savings.
3. Minimise Your Capital Gains Tax Liability
The Capital Gains Tax (CGT) threshold is £10,100 ie this is the value of capital gains you can make before you are liable for capital gains tax. The CGT increased to 28% for higher rate tax payers in June this year.
If you are a couple your joint CGT allowance is £20,200 and you can share assets to maximise your allowance.
You can minimise your CGT liability for example by ensuring you use your full allowance and if you have a second home how to take advantage of it, including the so called ‘property flipping’.
Also there are opportunities to reduce your liability if you have a furnished holiday homes – those that are occupied by clients for at least 70 days a year but are free for 140 days are eligible for entrepeneurs relief on the CGT level.
You can spread you CGT burden by offsetting capital losses from previous years against current gains, as well as carry forward current capital losses to be offset against future capital gains.
Speak to a financial adviser for detailed advice and to assess your own specific opportunities in this area.
4. Use Your Pension to save on your tax and reduce National Insurance payments. Saving into your pension can be particularly beneficial if you currently pay tax at 40% but will drop to a lower tax band when you draw your pension.
You can also use salary sacrifice to reduce your National Insurance payment as both you and your employer pay an amount directly into your pension fun.
As you can now see there are a wide range of points to consider but well worth doing to help you cut your tax bill.
And of course, don’t forget that VAT will increase from 17.5% to 20% from 4 January 2011.
This article has been prepared to provide thought provoking ideas on how to cut your tax bill and should not be taken as direct advice – as appropriate you should seek advice from a professional adviser to address your own specific needs.