The taxman says three and a half million people are due a refund, but two million will have to fork out for underpaid tax.
How to pay less tax
Image © Getty Images
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.
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.
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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).
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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.
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.
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I got an idea, how about tax us on our earnings, (and on our savings) then when we buy a car tax us again, when we drive on the road tax us again, then when we fill it up tax us again. Also I thought a good idea would be to tax us on food and goods we purchase, then tax us to live in our own property, or when you sell it. And if we manage to leave any money for our children when we die........tax us again.
O sorry somebody has stolen my idea, i think i will tax them on it!!!!!!!
I was brought up to be honest and hardworking and it upsets me deeply that this was probably a mistake. I know an ex-con who has lied, cheated and stolen his way to wealth and he lives in a house 3 times the size of mine and spends more on holidays than I earn a year.
Most of the successful people I know have moved / plan to move abroard. If things continue the way they are going I'll be off too. I have travelled a lot and I love the UK but it is time to join the 1/4 million who leave every year and accept there are far better places.
does this guy live in the real world, who the hell in theses times can put over 5,540 pounds into a Isa.
I think i can safely safe that includes the majority of us
I am not a tax expert and HMR&C will be after me because THEY WANT YOUR MONEY.
Look at the top of the article.....
"Sponsored by Halifax"
It's just another advert.
From what I understand, the government has just given all of the public money to the private sector (Banks) who have in turn had it mostly for themselves, is this even in the UK constitution. When they give victims of all this £60 a week they are persecuted and condemned as scroungers ect.
Just put all the money back, Bankrupt those responsible, jail them for fraud and sell all there assets as gained by criminal acts.
That is exactly how the rest of us would be treated. We all supposedly live under the same Law its past time we did.
All government Jobs and those in Politics should be capped at £60,000 per year so that people who care about this country would be running it.
Just my simple opinion
I should be RICH.... lol
I don't go Out to the Pub, I don't have a Car and I don't smoke...
And still got No Money.......
Cost of Living is enough..
Personally I think Greece should be forced into selling a few islands and (some) bankers be turned out on to the street whilst their mansions are auctioned off. MPs stop giving them selves pay rises several times higher than the average and pensions of astronomic proportions.
I guess it makes sense to maximise your income by avoiding paying tax but if we had a sensible tax system then it would not be necessary.
I have worked hard all my life, changed jobs several times, retrained when made redundant, did a degree and a masters. Yet this country keeps kicking me when I'm down. It is so difficult to get ahead and live the comfortable life I would like for my family. I earn what I thought was a descent salary but it only just covers our outgoings.
Our tax system is screwed, unfair and over complicated. Even the tax office cannot work it out most of the time. It seems deliberately geared towards the rich, who are taxed heavily, but who can also afford accountants to find all the loop holes and avoid paying most of their tax burden.
Most of the advice in the article is good advice aimed at normal people who may find themselves with a bit of spare cash (say due to a parent dying and leaving them something). It certainly does not highlight the real tax cheats. I think the criticism in many comments is unfair.
I find taxes on inheritance (and CGT) morally wrong and should be abolished, it is simply legalised theft by the state. Tax should only be paid once and governments need to learn to live within their limits - it is not their money they squander, it is ours!
The cost of living is ridiculous, the tax expectation is ridiculous, the corruption is ridiculous.
But, it is what we have allowed to develop. We vote (or apathetically allow by not voting) for leadership that is self serving and greedy. We stand by and take no action when public servants like bankers steal and squander OUR money.
As a nation we are becoming fat, greedy, immoral and lazy. The state has to ensure that we get fair deal but people have to understand you get what you work for. A good life is not guaranteed! If nothing is done things will soon be much worse. MPs could start by looking into their own finances.
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