Seven ways to reduce your tax bill

by Christina Jordan on 21 January 2010  |  10 comments
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Check out these seven legal ways to reduce your tax bill, and your stress levels.

If you need to submit a tax return for 2008/2009 you need to stop what you are doing now (well, after you have read this) and get working on it.

This is because - if you've never submitted a return online before (which is your only option right now) - it takes seven days to get an activation code and a further 72 hours to activate it. So you are going to be cutting it extremely close when you consider the tax return deadline for 2008/09 is 31st January.

Who has to do it?

Anyone who has been asked to by the HMRC is the short answer, and this is mainly the self-employed -- including sole traders as well as business owners. If you are employed you might also have to do a tax return if your circumstances change -- for example if you move into the higher rate tax bracket. Others are unlucky enough to be randomly selected.

What do you have to do?

Basically you need to work out the tax you owe on your income for the 2008/2009 tax year (which runs from 6th April 2008 to 5th April 2009), file a return showing this and pay the money to the Revenue by the 31st January. If you miss the deadline you will be fined £100 for starters, with further penalties possible if it's really late.

Many self-employed people also have to pay on account for the following year. For example I paid my 2008/2009 tax bill today and half of my 2009/2010 tax bill -- the remaining half is due by 31st July.

The reason for my double whammy is that 2007/2008 was my first tax return and I got a reprieve from paying on account for the following year (08/09). It doesn't make me feel any better now though, but I suppose it all evens out in the end!

How do you work out what you owe?

You could get an accountant to work it out for you, for which you will have to pay a one-off sum. My accountant charged £275 plus VAT which is pretty reasonable, but then I live in 'cheap as chips' Manchester. The price varies wildly -- I know of some journalists paying £500 plus for their tax return and other friends locally who pay as little as £150.

You could employ an accountant for greater hands-on help if you need professional help with more than just your annual tax return. This is advisable if you decide to set up a business or if you have complex finances.

Or can use the HMRC's self-assessment calculator to do it for you. As long as you have all your details to hand this will be pretty straightforward, and it tells you exactly what information you need to input, and how much tax you have to pay at the end.

Don't believe the hype though, tax is still taxing - and that joke is really not very funny when the HMRC site crashes, as it did last year on the 31st January.

In other words, don't leave it until the last minute.

Can you minimise your tax bill?

This is where an accountant can prove invaluable because they know what you can and cannot do to minimise your tax liabilities. Here are some dos and don'ts, but take specialist advice if you are unsure:

1) Do keep a record of all your travel expenses.

You can claim plane, train and automobile costs as long as the trips were made for business purposes.

2) Don't ever try to over-egg these.

You must have the receipts if HMRC comes knocking on your door. I keep a shoe box full of taxi receipts for each tax year -- probably not the most organised method but they are all there! I also try to write down the details of each trip on the back of the receipt, as you can't claim it if you don't remember what it's for. A chap at a tax workshop gave me a great tip -- he has one diary for expenses and he keeps a record of the business travel he does and then staples in any taxi, train or indeed petrol receipts (I haven't got around to this one yet though!).

3) Do remember the cost of running your office.

Lighting, heating, power and other utilities can all be claimed for, in the proportion that applies to your business (in other words, if you work from home you cannot claim for 100% of your bills!). If you need the internet for work though, you can claim for some of your broadband costs for example.

4) Don't forget your savings income.

You are taxed at the basic rate on this so if you are a non-UK taxpayer you can claim this back using form R40. If you are a higher rate taxpayer you need to declare what savings interest you have earned and pay the extra tax.

5) Do extend your basic rate tax band by making pension contributions.

In 2008/2009, we all had a personal tax allowance of £6,035 and a basic rate tax band of £34,800, after which earnings are taxable at 40%.

So if you earned over £40,835 in the last tax year, you're a higher rate taxpayer. But you can claim some of your higher rate tax back, if you made pension contributions in that tax year.

For example, let's say you earned £45,835 in 2008/2009, and made a gross contribution of £5,000 to your pension. Basic rate tax relief of 20% - £1,000 in this example - would have been claimed by your pension scheme, so you would actually only have had to write a cheque for £4,000. Well guess what? When you fill in your tax return, you'll also qualify for 20% higher rate tax relief - so in this case, another £1,000.

In other words, you can claim back the £1,000 of higher rate tax that you have to pay. Effectively, because you made £5,000 of pension contributions, you pushed up your basic rate tax band by £5,000, from £34,800 to £39,800.

So you only pay higher rate tax when you earn over £45,835. As you earned just £45,835, you shouldn't have to pay any higher rate tax at all - and if you've already paid it, you can claim it all back!

As Tom McPhail, from pensions and investments firm, Hargreaves Lansdown, says: Higher rate tax payers contribute a disproportionate share of income tax (for example, the top 1% of earners contribute 24% of the tax). Pensions and the higher rate relief are one of the few ways that these taxpayers can redress the balance. 

6) Don't pay more than you need to.

Although paying on account means you pay based on last year's earnings, you can apply to reduce this liability if you know that your profit in 09/10 will be significantly lower than in 08/09. You need form SA303 from HMRC.

7) Don't stick your head in the sand.

If you are worried you will not be able to pay your tax bill contact HMRC. It is more likely to be understanding with those who are upfront about any financial difficulties than those it has to chase.

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