Don't pay too much tax: a dozen simple tips

While Wayne Rooney and other footballers earning megabucks can afford to pay accountants big fees to come up with tax saving ideas, most of us have little or no advice on how to minimise our tax bill.  This is important because tax is complicated and if you want to keep payments to a minimum, you will either have to take an interest in your financial affairs or pay an accountant for advice.

For those who don’t want to pay fees here are a dozen tips on how legally to keep tax payments to a minimum.

1.       The vast majority of taxpayers are employed - but do not assume that your employer is necessarily deducting the right amount of tax through Pay As You Earn.  He will deduct tax according to the tax code issued by HMRC.  But as we saw recently when the tax man issued some 6 million notifications of over-payment and under-payment of tax, these codes are not always correct. There is a tax checker function on the HMRC website.  

2.       Make sure you claim all the allowances to which you are entitled – for example, Age Allowance, a higher personal allowance for the over 65s, and higher Age Allowance for the over 75s.  Remember too you are no longer liable to pay National Insurance if you are still working after State pension age – currently 60 for women, 65 for men.

3.      Married Couples Allowance - If you were married before 5th December 2005 and at least one spouse was born before 6th April 1935, the husband can claim Married Couple’s Allowance of £6,965 which reduces your tax charge on that income by 10%. The actual amount of MCA depends on the husband's income. If you married on or after 5th December 2005 or are in a civil partnership and at least one spouse or partner was born before 6 April 1935, the person with the higher income can claim Married Couple’s Allowance.

The actual amount of Married Couple’s Allowance depends on the income of the spouse or civil partner with the higher income.  

4.      Make use of the tax advantages of Individual Savings Accounts (ISAs). The maximum investment for 2010-11 is £10,200 per person.  Investments in an ISA roll up free from Capital Gains Tax and income from fixed interest investments such as government stock, Permanent interest bearing shares (Pibs - special shares issued by building societies), corporate bonds and the like can be taken free of income tax.  Had you invested the maximum allowable every year since 1987 when Personal Equity Plans were first introduced and then replaced with ISAs in 1999, you could now hold a total of £175,800 in the ISA tax shelter – not including any of the investment return on these funds.  This could easily total £300,000 or more.

5.      Having invested first in ISAs consider putting money into pension schemes – particularly if your employer matches your contributions.  For most people contributions are eligible for tax relief at their marginal rate of tax, up to 50% on annual contributions up to £50,000 or 100% of earnings, whichever is the lower, from April 2011.  Tax relief on contributions for those with earnings over £150,000 will be restricted.

The maximum allowable for tax relief includes contributions by your employer to an occupational pension scheme as well as personal pensions.  If you have a non-earning partner or other member of your family, including children, you can invest up to £3,600 per annum in a stakeholder pension on behalf of that person and the net cost after tax relief is only £2,880. You do not have to be related to the person for the contributions to qualify for tax relief.

6.      If you are married or in a civil partnership consider equalising investments between the two partners in order to take advantage of both annual Capital Gains Tax allowances (£10,100 for 2010-11).  This is particularly important for buy-to-let investors who must inevitably sell assets in relatively large amounts in excess of the annual nil rate band.  Make use of your annual CGT nil rate allowance by realising profits on paper assets like shares up to the £10,100 limit.  Realised losses can be carried forward indefinitely and set against future gains.

7.      Equalising assets can also reduce income tax liabilities.  If one partner pays tax at a lower rate than the other or is a non-taxpayer, equalising income from investments will reduce the total tax paid – particularly where one is a 50% taxpayer and the other a non-taxpayer.