Ten legal ways to dodge tax

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 31 July 2011  |  Comments 19 comments

Don't hand over too much to the taxman. Instead, use these 10 legal ways to trim your taxes!

Ten legal ways to dodge tax

This year, British taxpayers will hand over a massive £13.5 billion in over-payments to the taxman. Here’s are 10 legal ways to avoid this fate:

1.     Claim tax credits

According to unbiased.co.uk, the biggest tax wastage comes from households not claiming tax credits.

In total, we lose over £8.5 billion from not claiming credits such as Child Benefit, Child Tax Credit, Working Tax Credit and Pension Credit. These benefits are not taxable and therefore don't need to be declared on your tax return.

Although these benefits are primarily aimed at families with children and retired folk, it's estimated that nine in ten UK households qualify for some kind of tax credit or state benefit. Check your entitlement at free, independent website Turn2us.

2.     Dodge this death tax

After tax credits, the second-highest tax wastage is paying unnecessary Inheritance Tax (IHT). Around £1.3 billion is lost through errors would could easily have been avoided through basic tax-planning to avoid the 'death duty which arrives after you depart'. Here are 10 ways to avoid IHT.

3.     Get an ISA

The humble ISA is the most popular tax shelter in the UK. Note that an ISA isn't an investment; it merely shields cash, shares, funds, bonds and other investments from tax.

By saving inside a cash ISA, you earn tax-free interest on your savings. Anyone aged 16 and over can put up to £5,340 into a cash ISA in the 2011/12 tax year. Those who prefer shares and don't put anything into a cash ISA can invest up to £10,680 into a stocks and shares ISA this tax year.

So, if you hold cash or investments outside of an ISA, transfer them into an ISA today.

4.     Pay into a pension

One easy way to reduce your current and future tax bills is to pay more into your pension. If you pay 20% income tax, then a £100 contribution into a pension costs only £80, thanks to £20 of tax relief. To get the same £100, higher-rate (40%) taxpayers need pay in only £60, and additional-rate (50%) taxpayers need pay in only £50.

5.     Stop tax on your savings

Before savers get their share, the taxman automatically deducts a fifth (20%) of savings interest 'at source'. This applies even to non-taxpayers, whose income is below the tax-free allowance of £7,475 in the 2011/12 tax year.

Thus, savers on low incomes -- especially pensioners -- should check to see if tax is being wrongly taken from their savings interest. By completing and submitting a form R85, you can get interest paid gross (without tax taken off). Also, you can reclaim any overpaid tax via a form R40.

6.     Invest in employee share schemes

If you work for a business which has shares listed on a recognised stock exchange, then you can take advantage of low-risk, tax-free investments known as employee share schemes. Typically, these involve saving a set amount each month which is used to buy discounted or low-cost shares.

The two most popular savings-related share schemes are known as Save As You Earn (SAYE) and Share Incentive Plans (SIPs).

7.     Save tax via your spouse

Gifts and transfers between spouses (or same-sex Civil Partners) are entirely free of tax. Hence, if your spouse is a non-taxpayer or pays a lower rate of tax than you, then you can save money as a couple by moving assets into his/her name.

8.     Avoid Capital Gains Tax

Capital Gains Tax (CGT) is a tax paid on the profits from selling assets such as shares, property (not your main home), bonds, etc. The standard rate of CGT is 18%, but 40% and 50% taxpayers are liable for CGT at 28%.

However, every adult and child in Britain has a tax-free CGT allowance, which is £10,600 this tax year. Thus, by realising your capital gains and losses in a tax-efficient manner (such as spreading gains over two tax years), you can dodge CGT. Here are 10 ways to avoid Capital Gains Tax.

9.     Give via Gift Aid

When donating money to registered charities and good causes, be sure to do so via the tax-efficient Gift Aid scheme, which adds tax relief to your donations.

For example, when you donate £10 to a charity, the taxman adds £2.50, making your total gift £12.50. Higher-rate taxpayers can claim another £2.50 in tax relief via their tax returns, making the net cost of this gift just £7.50. For 50% taxpayers, the net cost of a gift of £12.50 is only £6.25.

Therefore, declare all of your Gift Aid donations to the taxman. Also, check to make sure you've done so in previous tax years and reclaim any overpaid tax.

10.           Check your tax code

It pays to check your tax code to make sure that you're not paying too much tax. Having helped countless people with their tax returns over the years, I reckon that up to half of all Notices of Coding are wrong.

Hence, please check your tax code carefully to make sure that there are no incorrect deductions from your basic allowance of £7,475 for 2011/12.

More: Save tax with an ISA | Increase your ISA return by 15 times | How to create an infinite income

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Comments (19)

  • Anthony Rentoul
    Love rating 1
    Anthony Rentoul said

    If you have a child under 15 (if disabled, 16) and incur childcare costs or, for a child under five, pay school fees, ask your employer for up to £2,916 pa in tax-free and NI-free childcare vouchers instead of salary. Get your partner to do the same. All very simple: go to www.abacusvouchers.co.uk

    Report on 31 July 2011  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    Most people don't use their capital gains tax allowance but even selling a copyright to a glossy magazine is subject to capital gains rather than income tax and the £10,600 allowance can be used. Capital gains tax doesn't apply to cars, household furniture and other things that you usually make a loss on. If by some miracle you manage to make a profit on the resale of a car it's a capital gain. if you make a habit of it, you're a dealer and have to pay income tax!

    I have some blogs this week, I haven't posted one for today; slow internet yesterday; but still frugal and thrifty blogs to choose from - http://wp.me/194MF

    Report on 31 July 2011  |  Love thisLove  0 loves
  • tuttogallo
    Love rating 99
    tuttogallo said

    The government rigs the system (PAYE and tax withholding on interest and dividends) so that, if the taxpayer does nothing, the government gets at least as much and probably more than it is entitled to. To get this overpaid tax back it is usually necessary to fill in a tax return form.

    My main message here is CHECK THAT YOU ARE PAYING THE RIGHT AMOUNT OF TAX and contact your tax office if you are paying too much. I have devised a spreadsheet which mimics the tax system. I am sure that such thing are availavle online. Everyone should know what their tax position is.

    So, don't let the taxman take you hard earned cash unles he is entitled to it. There must be so many people paying more than they should.

    Report on 31 July 2011  |  Love thisLove  0 loves
  • reubenw
    Love rating 3
    reubenw said

    a more laborious way of saving tax is by not paying it while building your own house. Every hour you work goes directly to your benefit and you're not employing someone else to do the work. Its not counted for CGT either if you only move every few years. . Good quality DIY is a lower energy version of the same thing. Dont spend your hard earned cash on someone elses tax bill !

    Report on 31 July 2011  |  Love thisLove  1 love
  • jamiecfc1
    Love rating 42
    jamiecfc1 said

    As an accountant I find that even my own clients will either not bother doing everything they can to minimise tax (usually not keeping receipts) or simply won't ask, despite several efforts at prompting. Most newly self employed people are the worst, with the reasoning that they don't need an accountant when they start - only when the tax return is due - by which time a year (or more) has gone by and a lot of things they could claim have been lost. You just can't help some people!

    Report on 31 July 2011  |  Love thisLove  0 loves
  • John99
    Love rating 0
    John99 said

    Hi, Jamiecfc,

    So how much does an accountant cost when one is just starting out?

    Report on 31 July 2011  |  Love thisLove  0 loves
  • Burt
    Love rating 0
    Burt said

    How do you know whether or not the Tax Office have given you a correct Tax Code Number,since April of this year I have been given 5 different Tax Code Numbers and I am being asked to make a payment for an under payment of Tax for years 2008/9 and 2009/10 in which a Tax Code number was allocated to me and my Tax was accordingly deducted by my Pension company in accordance with this number, I had no dealings with this it was an automatic deduction made by my Private pension company.

    I am 83 years of age and my wife passed awat in November 2009 and since then the Tax office have been giving me a very hard time, the Tax they are calling for applies to my Private and State Pension and they are suggesting they will use some of my Tax Free Benefits to minimise the Tax they say is underpaid but I strenguously refute and deny I owe this Tax, unfortunately I know nothing about these matters so can anyone please advise me what these Tax Free Benefits are and what I can do to stop these people from burdening me.

    I am being shunted fron one department to the other, I am writing to eight different departments at the moment every time I ask a question that they don't wish to answer they pass me to another department and at my age I could do without this especially after losing such a lovely wife.

    Many thanks,

    Burt

    Report on 31 July 2011  |  Love thisLove  0 loves
  • beckpepp
    Love rating 1
    beckpepp said

    Could we please have an article on how self employed people can save on tax - particularly what can be claimed as expenses. My husband is a builder, and we self assess, but I find it quite hard to find specifically what he can claim for - ie mobile phone? He only has one phone for personal and business - can I claim all that back? Also, how does depreciation work - he has a van that he uses for his work but how much etc can I put down for depreciation and in which section? Thanks, beckie

    Report on 31 July 2011  |  Love thisLove  0 loves
  • John99
    Love rating 0
    John99 said

    I was being serious, by the way, when asking how much you would expect to be charged for an accountant when starting up a business.

    I'm guessing it's house-keeping, really, isn't it?

    Keep those invoices for work done entered on a simple spreadsheet;

    Similarly, enter invoices and receipts for items purchased - fuel, work-wear, materials;

    Keep the invoices safe and in order.

    What more does one need to do?

    Report on 31 July 2011  |  Love thisLove  0 loves
  • chrisquinn
    Love rating 0
    chrisquinn said

    Salary sacrifice is another way of paying less tax or rather less NI. For instance by using a salary sacrifices scheme you can take home the same pay while at the same time increasing your pension contributions or you can actually increase your take home while maintaining your pension contributions. But be careful, health warnings apply. Read the small print.

    Report on 31 July 2011  |  Love thisLove  0 loves
  • mbhknight
    Love rating 3
    mbhknight said

    I certainly agree that over half the tax codes issued are wrong. In my case because I have been continually paying too little tax. I retired in 2002 having reached the age of 65. Like many of my generation I had contributed to the various government pension schemes but also had a total of 5 additional small employer pensions. I have been trying mainly unsuccessfully to get HM revenue to deduct the correct amount of tax monthly. The first error was to take tax from one of my smallest employer pensions so that I ended up with a comparatively high tax underpayment. After 6 years of trying I eventually got them to take tax from my largest employer pension. 3 years later I am still trying to get them to correct their coding so that I do not end up with tax owing every year.

    Report on 01 August 2011  |  Love thisLove  0 loves
  • Cliff D'Arcy
    Love rating 26
    Cliff D'Arcy said

    Hi Anthony Rentoul,

    Thanks for your comment on childcare vouchers, which only just failed to make my list.

    However, in the interests of balance and fairness, you should always declare the following interest when posting on this issue on lovemoney.com:

    http://www.abacusvouchers.co.uk/about_us.php

    Thanks!

    Cliff

    Report on 01 August 2011  |  Love thisLove  2 loves
  • Cliff D'Arcy
    Love rating 26
    Cliff D'Arcy said

    Hi Burt,

    I'm sorry to hear of your hassles with the taxman. This charity should be able to help:

    http://taxaid.org.uk/

    About us: "A charity offering up-to-date information and advice on tax matters to individuals on low and modest incomes."

    Also, you should contact your local MP and Age UK at:

    http://www.theyworkforyou.com/mps/

    http://www.ageuk.org.uk/

    Hope this helps.

    All the best,

    Cliff

    Report on 01 August 2011  |  Love thisLove  0 loves
  • Lovelyjoolz
    Love rating 5
    Lovelyjoolz said

    A quick note on the Childcare Voucher Scheme - Employers do not need to employ an agency such as the one advertised by Mr Rentoul above to administer their scheme. It is extremely easy and straightforward to do it yourself (or get your payroll dept. to do it).

    OK, so if you are a huge multi-national with staff numbering in their thousands, you would probably see the benefits of employing an agency to manage it. But agencies are, of course, trying to turn a profit themselves, and will charge you a % of the vouchers issued to cover their costs.

    That % is generally higher for smaller payrolls. This sadly, puts off many small companies from offering this facility, which is a shame as both the employee and employer benefit with savings on NI.

    Report on 01 August 2011  |  Love thisLove  0 loves
  • Lovelyjoolz
    Love rating 5
    Lovelyjoolz said

    beckpepp - If you post specific questions in the Q&A section of this site, there are lots of lovely people who will try and answer you.

    You would probably also benefit from a good bookkeeping text, but be careful not to get anything too technical - you just want to learn the tricks, not study for ACCA!. Search for small business bookkeeping on amazon, for example, and you should find that several good books come up. You can also find out a lot from HMRC's website.

    Report on 01 August 2011  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    I have always found the people at HMRC very helpful and they will give advice and even fill out forms for you. They are experts and we pay their wages, why not use them?

    Report on 06 August 2011  |  Love thisLove  0 loves
  • Tamara
    Love rating 20
    Tamara said

    Mike10613 you must be a very lucky man!

    I am an accountant and I have dealt with various tax offices over the last 10 years.

    It's a bit like a lottery, some are pleasant and very helpful and some are right down idiots who can't even understand the word 'intercalate'.......

    Currently I am helping a friend sort out his franchise books. The VAT man is chasing him for a late declaration after I have sent them 2 letters and received replies to them. Apparently there are several offices dealing with the chasing of the same issue and only 1 office can actually see our letters and their reply, the other offices are kept in the dark and just send out stressful money requests even after Her Majesty's people agreed to a long extension...... there you go!

    I called them on Tuesday, they have told me they couldn't see the letters in their system. Pick a different telephone number to a different office and it's all a different ball game....

    Report on 06 August 2011  |  Love thisLove  0 loves
  • Steviebaby1959
    Love rating 34
    Steviebaby1959 said

    @ beckpepp

    Have a look at the HMRC site regarding your self employment issues for your hubby.

    http://www.hmrc.gov.uk/incometax/relief-self-emp.htm

    Report on 10 August 2011  |  Love thisLove  0 loves
  • rugbymad11
    Love rating 0
    rugbymad11 said

    Hi,

    I am am member of the British Forces based in Germany, Lst year when i moved away from my UK post I rented out my house via a letting agency. I informed HMRC that I was letting my house out and was moving abroad. I have now received a self assessment form, obviously I have never had to do one of these before and have no idea what I can claim for. I dont make any money on the property the rent dosen't cover the mortgage /insurances and charges from letting agency.

    Please could you advise on what i can claim for to avoid a tax bill.

    Danke

    Steph

    Report on 11 August 2011  |  Love thisLove  0 loves

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