Ten legal ways to dodge tax

Updated on 01 August 2011 | 19 Comments

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

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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