As the saying goes ‘Nothing is certain but death and taxes’…
Really? Death I get, there’s no-one I know who doesn’t expect to die at least once, but in terms of taxes I’d beg to differ.
Now of course we all pay some tax, so the saying holds true in that sense, but I’d like to argue the case that the amount of tax you have to pay is definitely not certain.
According to the Adam Smith Institute, Tax Freedom Day this year was 12th June. That means that as a county we spent the first 160 days of the year just paying tax, equivalent to 44%. This includes all taxes, like income and capital gains tax, but also VAT, tax that companies pay and the tax you pay when buying a house.
How, then, can you make your tax freedom day come sooner? Easy, by paying less tax. So let me give you some ideas on how to do that.
The key is to use all the allowances and exemptions that the tax man offers you. Some of these happen automatically. Your first £11,500 of income, first £1,000 of interest and first £5,000 of dividends you receive are all tax free. But after that you have to start planning to pay less tax. An easy step is to shelter savings and investments from tax by using as ISA (Individual Savings Account). If you are married then you might find that your spouse as some tax free ‘space’ that you could use.
Making pension contributions is a very efficient way of paying less tax both now and in the future, especially if you are a higher earner who might lose out on Child Benefit (income between £50,000 and £60,000) or might lose their Personal Allowance (income between £100,000 and £123,000).
If you own shares or investment funds and can’t get them all into ISAs (which have a limit of £20,000 per person this tax year), then careful planning of selling and buying investments can save a lot of tax in the long run. When you sell investments for a profit you are tested for Capital Gains Tax. The first £11,300 of Gain this year is tax free. So, if your investments go up be £11,300 and you sell them, and then reinvest the money (in something different) you will pay no tax. However if you wait until next year and you’ve made another £11,300, when you come to sell you only get one year’s worth of exemption, so you’ve lost out on that extra tax free money. That would cost a higher rate tax payer £4,520 in avoidable tax.
So, don’t be a voluntary tax payer if you can.