How to stop paying tax

These 10 tips will slash your taxes to the bare minimum!

Here's a financial fact to make your hairs stand on end: the government currently spends £10 billion a month more than it collects in taxes and revenues. To put it another way, for each of the UK's 26 million households, this overspend comes to nearly £90 a week.

Can you imagine paying an extra £90 a week in taxes in order to balance our national budget? For all but the richest households, this would wipe out any disposable income, pushing millions into poverty.

Obviously, the government isn't going to raise taxes by this amount right away. Nevertheless, in the coming years, taxes must (and will) rise. Otherwise, the UK will get deeper into debt and lose its highly prized triple-A credit rating.

Ten ways to dodge tax

With more tax rises on the way, now is the time to put your financial affairs in order. By doing so, you can minimise your tax bill, both now and in the future. Here are 10 tips to help get you started:

Lower your 'sin taxes'

1. Avoid this 83% tax

Every time smokers spark up cigarettes, they burn money as well as tobacco. Of the, say, £7.20 retail price for 20 fags, around £1.20 is the underlying cost. The remaining £6 is made up of a 15.5p per-cigarette tax, 16.5% tobacco duty and Value Added Tax (VAT) at 20% on top.

In other words, taxes account for roughly five-sixths (83%) of the money spent on tobacco by the UK's 10 million smokers. No wonder the black market in tobacco smuggling is booming.

2. Drink less alcohol

Of course, smoking is a major health problem, but drinking to excess is becoming an ever-bigger drain on the NHS, too. Hence, the government keeps jacking up taxes on alcohol (especially spirits). This makes boozing more expensive and brings in more taxes to cope with the health and social costs.

Since 28 March 2011, the duty on a pint of beer is 41p, and £1.81 on a 0.7L bottle of wine. In addition, there is VAT at 20% added to both the retail price and duty. On a one-litre bottle of whisky, the duty is £7.15 (plus VAT on top, of course).

Hence, cutting back on alcohol will give you a healthier liver and a fatter wallet or purse.

3. Dodge this 50% tax

In its 2010/11 financial year, National Lottery promoter Camelot sold a record £5.8 billion of tickets, but paid out less than £2.9 billion in prizes.

In other words, less than half of ticket sales were returned to punters in prizes. As a group, Lotto players lose more than half their money, turning £2 into 99p. This is akin to a tax of over 50% on gamblers and people who are bad at maths.

For the record, 28% goes to good causes, 12% goes to the taxman, 5% goes to retailers and Camelot gets almost 5%. Hence, the biggest single winner from the lottery is the government, which gets almost £700 million a year in tax from the Lotto.

4. Drive less

According to the Taxpayers’ Alliance, UK motorists paid £31.5 billion in fuel taxes and Vehicle Excise Duty (road tax) in 2009. This averaged out at roughly £1,000 per driver per year, but is certainly higher now.

Why are these 'green taxes' so high? The simple answer is that taxes account for three-fifths (60%) of the price of petrol and diesel. Hence, a litre of fuel costing £1.35 includes a hefty 81p in taxes. Therefore, driving more efficiently, downsizing to a smaller car, or getting rid of your vehicle could sharply reduce the motoring taxes you pay.

Reduce your taxable pay

5. Pay more into your pension

When you pay into a workplace or personal pension, you earn tax relief on your contributions at a rate of between 20% and 50%.

Thus, if you earn £30,000 a year and pay £5,000 a year into your pension, you'll pay income tax and National Insurance contributions (NICs) on the difference (£30,000). Paying more into your pension is a great way to save for a brighter future, while reducing today's tax bill.

6. Buy childcare vouchers

Working parents can reduce the cost of living by buying childcare vouchers through their pay. The first £55 a week of vouchers is free from income tax and NICs, reducing their net cost to as little as £26.40 a week (that's up to 52% off). Two highly paid parents could save almost £3,000 a year by reducing their taxable pay via childcare vouchers.

7. Use Gift Aid

When donating to charities and other good causes, be sure to do so using the tax-efficient Gift Aid scheme. For basic-rate (20%) taxpayers, Gift Aid immediately boosts a £10 donation to £12.50. Higher-rate (40%) taxpayers can claim a rebate of 20% of this £12.50 (£2.50), reducing the cost of this £12.50 donation to just £7.50.

Just remember to include all Gift Aid donations on your yearly tax returns.

8. Grab tax-free state benefits

The government helps families with children through tax-free benefits such as Child Benefit, Working Tax Credit and Child Tax Credit. The first is a universal benefit, but the other two are means-tested. Similarly, pensioners on low incomes can claim Pension Credit to top up their earnings.

Your best guide to the UK's unbelievably complicated benefits system is independent website Turn2us (previously called EntitledTo).

Repel taxes on savings and investments

9. Get a cash ISA

The UK's most popular tax shelter (used by up to 20 million Brits) is the humble ISA (Individual Savings Account). The most popular type is a cash ISA, which allows you to earn tax-free interest on cash deposits.

This tax year, you can put up to £5,340 into a cash ISA and pay zero tax on your interest. In the 2012/13 tax year starting on 6 April, this limit rises by £300 to £5,640. Therefore, if you're a tax-paying saver aged 16 and over, then you must have a cash ISA. It's as simple as that!

10. Get a shares ISA

Lastly, if you want to invest in shares, funds or bonds, then you should safeguard these investments inside a stocks and shares ISA. This prevents taxes being charged on your investment income (such as share dividends and bond coupons) and capital gains (made by selling assets at a profit).

If you haven't paid anything into a cash ISA, then you can invest up to £10,680 into a stocks and shares ISA this tax year. This limit rises by £600 to £11,280 from 6 April 2012. Otherwise, these limits are halved if you also have a cash ISA.

What are your best tax-saving tips? Please tell us in the comments box below!

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