As credit crunch continues to creep it’s tentacles into the world finance, the last thing you would want to do is pay extra tax.
On the average, one sixth of your salary goes in paying income tax. By the time council tax, VAT, excise duty and various other taxes have been deducted, around a third of your hard-earned money goes to the Treasury. If you are overpaying, you may even fall into debt.
All of us know that claiming back tax is inconvenient and time consuming. But a few simple precautions and awareness can help you pay lesser tax. Here are the simplest ways to cut your tax bills.
• Know your tax code
If you pay your tax via PAYE, it is deducted in response to your tax code. You can see this on your monthly pay slip. When HMRC sends you your annual P60 and any coding notice, always ensure that your code is correct. In case of any doubt about what the numbers and letters mean, visit www.hmrc.gov.uk /incometax/codes-basics.htm for help. It is important to check your tax code if you have more than one job, you change jobs and when you reach 65 (you should get a higher tax-free allowance but people normally tend to overlook).
If you are aged over 65 and have an annual income of under £21,800 (2008-09), you can receive up to £9,030 tax-free. If your code is incorrect, you may only get the standard tax-free allowance of £6,035. By getting your code corrected, you would be paying up to £599 less tax (approx).
• Claim expenses
If you are self-employed, you can deduct allowable expenses from your gross profits before paying tax on the remaining amount. This can comprise the entire cost of business tours and miscellaneous expenses.
If you work from home you can also claim for a share of heating and lighting and other bills, such as water tax and mortgage interest.
Buy purchasing a computer for your work, you can claim part of the cost. For example, if you claim for a laptop, that cost £1,000, you can cut your tax bill by £200.
• Give to charity
Gifts to charity made through the tax-relief schemes can cut your tax bill. Basic-rate taxpayers aged over 65 can also benefit from charitable giving through Gift Aid. If you are paying 40% of your income in tax, and give £200 a year to charity, you can claim £50 tax relief if you donate through Gift Aid.
Once you have received this money, you can either keep the cash or donate it as an extra gift.
• Avoid tax on savings
On your savings, interest is normally taxed at source. However, a non-taxpayer, like a minor or an aged person whose income is below the tax threshold, can fill up a form (R85), available from banks and building societies to get interest paid free of tax.
You can have tax-free saving if you put money into an individual savings account (ISA) and index linked saving certificates.
On your ordinary savings account, where you pay the same interest rate, you would be taxed at 20percent, reducing the amount you earn to £439. If you use an ISA, you can gain an extra £110 interest (approx).
• Give your room on rent
Sometimes you might find it tough to pay your mortgage. This is a good time to keep a paying guest.
Under the rent-a-room scheme, if you rent out a furnished room in your home and receive less than £4,250 a year, there is no need to declare this income on a tax return. If you earn £4,000 or less in rental income each year, this goes tax-free and will save you £800.
• Make a salary sacrifice (apparent)
You can voluntarily agree to a salary sacrifice. This scheme means that you want to be paid less but would take the compensation for this by additional contributions to your pension or by tax-free, non-cash benefits, such as childcare vouchers etc. Your tax and national insurance (NI) bill will drop as your gross income is reduced.
• Pension payments
You are eligible to get tax relief by paying into a pension scheme.
Big savings can be made by those who pay income tax at 40 percent during their working lives and then pay tax at a lower rate after they retire.
• Carry forward losses
If you are self-employed you can cut the amount of tax you need to pay by carrying forward losses from previous years.
• Child trust fund
If you transfer money to your children and this earns greater than £100 yearly interest, you will be taxed on all the income as if it was your own. You can avoid this by putting the money into a child trust fund(CTF). Interest on money in a CTF is tax-free.
• Assets transfer
If a married couple, or civil partners, pay tax at different rates, they can cut their tax bill by transferring ownership of savings and investments.
If you pay tax at 40 percent, you can transfer assets to a partner who pays at 30 percent. An equally effective transfer can be made between anyone who pays at 30 percent and a partner who doesn't pay tax.
Patricia is a debt management expert. For more <a href="http://www.yesdebtfree.co.uk/debt-management.html">debt management advice</a>, she recommends you to visit http://www.yesdebtfree.co.uk/Click here for more from this author