How to pay less tax

The chancellor announced a number of impressive tax giveaways in yesterday's Budget.

The catch (there's always a catch, isn't there?) is that most of these breaks will only come into effect in 2015 or later.

In order to help you reduce your tax burden far sooner, we've put together a list of 10 handy tips (in A-Z order) that will shrink your tax bill not only this year - but in the years ahead as well.

• Avoid tax on savings with a cash ISA

1. Claim business expenses
If you are self-employed or run your own business, then keep receipts and accurate records of all expenses incurred in your line of work. These include travel expenses for business trips, payments for office supplies, tools and equipment, and so on. All valid expenses incurred 'wholly or mainly' for business purposes can be offset against your yearly tax bill.

2. Collect tax relief on pension contributions
When you pay money into a company or personal pension, these contributions attract tax relief at your highest rate (20%, 40% or 50%). To claim this tax relief, any pension contributions not made through your payroll (via the Pay As You Earn system) must be declared on your annual tax return. If in doubt, always tell the taxman about any additional pension contributions you make.

• Get a tax-free index tracker ISA

3. Cut back on 'sin taxes'
Each year, the government collects tens of billions of pounds in so-called 'stealth taxes'. Some of the biggest of these are the 'sin taxes' levied on alcohol, tobacco and fuel.

For example, a packet of 20 cigarettes costing £7.20 breaks down into a retail price of, say, £1.20 and £6 of tobacco duty and VAT (Value Added Tax). Similarly, we pay steep taxes on beer, wine and spirits - the stronger the drink, the higher the tax. Also, taxes on petrol and diesel account for about three-fifths (60%) of their retail cost (and that's before fuel duty goes up next month).

Therefore, cutting back on unhealthy and polluting habits will trim your taxes, too.

4. Get Gift Aid on donations
To encourage us to give to good causes, the government provides tax relief on charitable donations through the Gift Aid scheme. This boosts the value of your gift by a quarter (25%), which means that a £10 donation with Gift Aid is worth £12.50 to a charity.

Furthermore, if you pay higher-rate tax (40%) or additional-rate tax (50%), then you should claim additional tax relief by declaring all Gift Aid donations on your tax return.

5. Manage your capital gains
If you make profits from selling shares, property (not your family home) and other assets, then you may be liable for Capital Gains Tax (CGT) on these gains. Then again, you have a yearly tax-free CGT allowance, which is £10,600 in 2011/12. Only gains above this threshold are liable to CGT, at a standard rate of 18%, or 28% for higher-rate taxpayers.

Although very few Brits pay CGT, it is still worth taking steps to avoid it. These include crystallising losses to offset gains, spreading gains over two or more tax years, shifting gains to your spouse and using ISAs (see below).

6. Grab childcare vouchers
Working parents can reduce their income tax by collecting childcare vouchers from their employer. Swapping some of your salary for these tax-free vouchers can reduce your taxable earnings by up to £2,916 a year. As a result, these vouchers could make two high-earning parents up to £3,000 a year better off.

However, since 6 April 2011, new applicants for childcare vouchers have had their weekly tax-free allowance cut to £28 for 40% taxpayers and £22 for 50% taxpayers. Despite these lower limits, these tax-efficient vouchers are still definitely worth grabbing.

7. Open a Cash ISA
The ISA (Individual Savings Account) is the UK's most popular tax shelter, used by around 20 million savers and investors. In the 2011/12 tax year, any British saver aged 16 and over can deposit up to £5,340 into a cash ISA and earn tax-free interest on this nest egg. What's more, this limit rises by £300 to £5,640 on 6 April.

Therefore, if you want to start saving, or already have money on deposit, then drop this cash into an ISA. Otherwise, you'll end up needlessly paying tax.

• Avoid tax on savings with a cash ISA

8. Open a stocks and shares ISA
Just as cash ISAs keep the taxman's hands off your savings interest, stocks and shares ISAs keep him away from the income and capital gains made by investing in shares, bonds and other financial assets.

The upper limit for contributions to a stocks and shares ISA is £10,680 in the 2011/12 tax year, of which up to half can be put into a cash ISA. Thus, without a cash ISA, you can contribute the full £10,680 into a stocks and shares ISA. From 6 April, this limit leaps by £600 to £11,280, which adds up to a mighty £22,560 tax shelter for a couple of keen investors.

9. Take tax-free benefits
There is a wide range of state benefits available to pensioners, working families, and sick, disabled and unemployed Brits. Many of these are tax-free payouts, including Child Benefit, Child Tax Credit, Working Tax Credit and Pension Credit. Here's a list of all 32 tax-free state benefits, none of which need to be declared on your tax return.

10. Transfer assets to your spouse
When you give assets to your spouse (or same-sex civil partner), any capital gains also pass across. Therefore, by dividing assets between you and your partner, you can split any underlying capital gains. This allows you to take advantage of two sets of CGT allowances, thus doubling your tax-free threshold to £21,200 in 2011/12. This could save you as much as £2,968 (28% of £10,600) this tax year.

Finally, good luck with your future life as a legal tax-dodger.

• Get a tax-free index tracker ISA