Are you paying too much tax?

Table of contents

• Claim all the income tax allowances to which you are entitled
• Beware Pre-Owned Asset Tax
• Check your tax code
• Investments for couples
• Investments
• Sole trader vs. limited company
• Self-assessment

Tax planning is an essential part of general financial planning. Here are some of the many ways we can help you:

• Buy property tax free - Click here for information on SIPPS
• Self-employed - Lump sum or regular pension contributions can have a significant impact on your tax bill. Click on our pensions page for more information or contact us for a personal discussion
• ISAs  - Have you used your annual allowance? See the ISAs page. Also see below under the Investments heading.

Claim all the income tax allowances to which you are entitled

The UK tax system provides a number of valuable personal allowances, particularly if you are older - such as the married couple's allowance, additional (age related) personal allowances if you are over 65 and higher again if you are over 75 or a registered blind person which also has its own allowance.

Each allowance reduces the amount of tax you pay. However the 'tax man' doesn't know everything about you, and if you don't ask you may not get all the allowances to which you are entitled. (see 'check your tax code' - below)

If you do not pay tax then remember you can register to have interest paid to you gross - without deduction of tax. Your bank or building society can give you the appropriate forms.

You can find out more from your tax office (the Inland Revenue are usually very helpful! - call 0645 000444 or click on: http://www.inlandrevenue.gov.uk. If you find you have forgotten to claim an allowance you may be in for an unexpected windfall; if you have overpaid tax in the past you can reclaim it - with interest!

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Check your tax code

The 'tax man' doesn't always get it right - particularly if you have more than one source of income, such as a job and an occupational pension (particularly common now that people retire earlier and then embark on a second career).

Each time you receive a tax code from your tax office it is accompanied by an explanatory leaflet which explains the components of the calculation. Take 5 minutes to check you are receiving all the personal allowances to which you are entitled - particularly if you are over 65 or over 75.

Also check that you are not being charged for benefits in kind you are no longer receiving. For instance - if you have given up your company car recently, check to see if the Inland Revenue have removed this from your tax code.

Again you can find out more from your tax office - call 0645 000444.

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Investments for couples

If you and your partner (married or unmarried) have joint investments you'll save tax by transferring your investments to the partner who pays the lowest rate of tax (earns the least) - particularly useful if your partner does not earn enough to pay income tax. Remember however that the investments do become the property of the person to whom they have been transferred (which may be problematic if you split up).

If you are married you can give assets to your partner and create a 'deemed disposal' without incurring capital gains tax - this is very helpful for reducing any potential capital gains tax bill you may have as you can use your married partner's capital gains allowance of £8,500 (Year 2005/2006) in addition to your own.

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Investments

Tax considerations should never be the main motivation behind the decision to save or invest, but once you have made the decision you should consider holding your investments in the most tax efficient way.

If you do not pay tax then remember you can register to have interest paid to you gross - without deduction of tax. Your bank or building society* can give you the appropriate forms.

If you are a taxpayer then you should utilise your annual ISA^ allowance.

There are tax advantages to investing in unit trusts, investment trusts and OEICs in that investments within these are exempt from capital gains tax. You will only pay capital gains tax when you sell the unit trust, OEIC or investment trust and, at that time, your capital gains tax liability will be reduced by taper relief in line with the number of years in which you have been an investor.

If you pay income tax or capital gains tax it is often beneficial to hold shares, unit trusts OIECs and investment trusts through an ISA.

If you are saving long term - and don't need the money until you are fifty plus - a pension is still the most tax efficient way of saving. If you are a higher rate taxpayer, for every £1 you contribute, the 'tax-man' effectively gives you back 40p. There are of course disadvantages, in that the uses to which you can put your investment, once realised, are limited.However, if you wish to control your own investment strategy while still enjoying the benefit of the tax shelters afforded by a pension scheme, consult us about whether a Small Self Administered Scheme (SSAS) or a Self Invested Pension Portfolios (SIPP) makes sense for you.

If you are investing in small companies then the Enterprise Investment Scheme (EIS) does offer benefits in terms of income tax relief, deferral of capital gains arising from other investments, and capital gains tax exemption on the investment made. EIS investments, which tend to be either unquoted or listed on AIM, tend to be very risky. Venture Capital Trusts (VCTs) once provided a way of deferring existing capital gains or making investments that are exempt from capital gains, but since 5/4/2006 this concession has been replaced with straight 30% tax relief on all investments up to £200k. Once again however VCT investments can be very risky.

Avoid CGT Capital gains tax (CGT) on shares and houses (if you are buying to rent).

This catches thousands of people each year and almost always unnecessarily. CGT can usually be reduced or even avoided entirely - but it does require planning - before you sell the asset in question. Lots of people are being caught out each year when they sell de-mutualisation and privatisation shares (and it ends up costing them hundreds or even thousands of pounds).

What if you don't declare the sale? The Inland Revenue receives notification from stockbrokers and share shops.

Each individual receives a capital gains tax allowance and, if you are married, you can transfer assets to your partner before sale and then make use of their capital gains tax allowance as well.

However be careful because once you sell any asset you incur the capital gains tax liability. Take professional advice before you sell the asset in question. Contact us - we will advise you on tax planning strategies appropriate to your circumstances. 15 minutes of your time could save you thousands of pounds.

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Sole trader v. limited company

If you are setting up in business the choice of whether to be a sole trader or a limited company could save (or cost you) thousands of pounds a year. Both have their advantages and disadvantages depending on how much you earn, how many customers you have, who these customers are and your long term ambitions for the business. This can be complex so contact us.

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Self assessment

Self assessment applies to self employed taxpayers, Directors of Limited Companies or those who pay a higher rate of tax. The Revenue will usually forward the tax return at the end of the tax year.

The taxpayer then has two alternatives. They may either file the tax return by the following 30 September and the Revenue will calculate the obligation (or tax rebate), or the return can be forwarded by the following 31 January if the taxpayer would prefer to perform the calculation themselves.

There are lots of useful tips and information contained in the Inland Revenue's web site. Click on: http://www.inlandrevenue.gov.uk

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Pre Owned Asset Tax

We would be surprised if you had heard of this tax. It was stealthily introduced in April 2005 with the intention of detering IHT (Inheritance Tax)avoidance. However, it has had a rather unpleasant side effect in that it can affect thousands if not millions of unmarried couple who jointly own their residential property together.

Without going into too much detail, if you bought a property with your unmarried partner any time since 17/3/86 and one of you provided a bigger deposit than the other, then you are potentially liable to a tax charge based on the hypothetical rental value of the property! For the tax to apply, the partner providing the gift must pay all the running costs of the house, a likely scenario in the case of a high earning male and a female partner staying at home looking after the kids.

For example, you stump up all the money to buy a £100k house which is owned jointly with your partner. Ten years later the house is worth £400k. Even if the couple since married, because the husband pays all the running costs the tax charge would be based on the £200k share owned by the wife x a % nominal rent eg 6% = £12,000 x 40% (assuming he is a high rate tax payer) = £4,800.

Thankfully, the way around it is to own the property as 'tenants-in-common' where each owner has a defined share. Your solicitor should be able to advise you on this, though don't be surprised if they have never heard of this ridiculous new tax - once again 'Edison Ford' leads the way in uncovering the little known traps which can lie in wait for you.

See http://www.hmrc.gov.uk/poa/ for more information

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To find a personal taxation adviser click here