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Ten ways to pay less tax

Martyn Hocking (Editor, Which? Money)
24/11/2008

AS the credit crunch continues to bite into our current and savings accounts, the last thing any of us wants to do is pay more tax than we should.

On the average salary of £30,456, you pay around £4,884 in income tax and £2,750 in national insurance (NI).

By the time council tax, VAT, excise duty and various other taxes have been accounted for, around a third of your hard-earned income, almost £10,000, has gone to the Treasury.

To make matters even worse, HM Revenue & Customs (HMRC) estimates that 34 per cent of tax returns are inaccurate, with consumers paying £340m too much each year as a result.

TEN TAX SAVERS

Claiming back tax is costly and time consuming.

But a few checks, some simple precautions and a little know-how can make sure you pay only what you have to first time around.

Overpaying tax is often caused by errors, but it can also occur if you fail to make the most of your allowances. Here are 10 of the most common (and easiest) ways to cut your tax bills.

Check your code
Tax collected through PAYE is deducted in response to your tax code. This appears on your payslip each month, your annual P60 and any coding notice HMRC sends you.
Always check that your code is correct. For an explanation of what the numbers and letters mean, see *Understanding your tax code', p18, Which? Tax Saving Guide 2008-09 or visit www.hmrc.gov.uk /incometax/codes-basics.htm for more details. 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 this can sometimes be overlooked).
If you are 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 should pay up to £599 less tax (see story right).
Check with HMRC if you think your code is wrong.

Avoid tax on savings
Interest on savings is normally taxed at source.
However, a non-taxpayer, such as a child or an older person whose income falls below the tax threshold, can complete a form (R85), available from banks or building societies, and get interest paid free of tax.
Tax-free saving is also possible for anyone who puts money into an individual savings account (Isa) and some NS&I products, such as index linked saving certificates.
If you pay £9,000 into a Best Buy Icesave cash Isa (see *Best Buys', p30), paying 6.1% interest, you would earn £549 interest a year, tax-free.
An ordinary savings account, paying the same interest rate, would be taxed at 20pc, reducing the amount you earn to £439. By using an Isa, you're gaining an extra £110 interest.

Give to charity
Gifts to charity made via the tax-relief scheme Gift Aid can reduce your tax bill. That's because higher-rate taxpayers can claim back the difference between the basic and higher rate on a Gift Aid donation.
Basic-rate taxpayers aged over 65 can also benefit from charitable giving through Gift Aid, as gifts reduce their income for the assessment of the age-related allowance.
If you are a higher-rate taxpayer 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 have the choice to either keep the cash or donate it as an extra gift.

Claim expenses
If you are self-employed, you can deduct allowable expenses from your gross profits before paying tax on what's left. These include the full cost of business travel and expenses.
If you work from home you can also claim for a share of heating and lighting and other bills, such as water rates and mortgage interest.
A new allowance lets you claim tax relief on the first £50,000 you spend on capital assets such as computers and machinery if you work for yourself.
If you are self-employed and buy a computer for your work, you can claim part of the cost of this. For example, if you claim for a laptop, that cost £1,000, you can cut your tax bill by £200.

Rent out a room
If you are finding it tough to cover the mortgage, then you may consider taking a lodger.
Under the rent-a-room scheme, if you rent out a furnished room in your home and receive less than £4,250 a year, you do not need to declare this income on a tax return.
If you earn £4,000 or less in rental income each year, this is tax-free and will save you £800

Take a pay cut
Salary sacrifice schemes involve agreeing to be paid less but being compensated for this by additional contributions to your pension or by tax-free, non-cash benefits, such as childcare vouchers or a subsidised bike. Your tax and national insurance (NI) bill falls because your gross income is reduced.
Visit www.which.co.uk/advice/salarysacrifice for more details.
If you earn £30,000 a year and take the maximum childcare vouchers of £243 a month, your annual taxable salary would drop to £27,084. The tax and NI you pay on £30,000 during a tax year totals £7,495 while it's only £6,591 on £27,084. This is a saving of £904 over the tax year.

Transfer assets
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 per cent, you can transfer assets to a partner who pays at 20pc. An equally effective transfer can be made between anyone who pays at 20pc and a partner who doesn't pay tax.

The gift must be genuine, so if a husband transfers savings to his wife, she can use it as she wishes.
A higher rate taxpayer will pay £2,400 tax on savings income of £6,000.
By transferring their savings to their partner's account, they can cut the tax paid to £1,200, effectively halving the couple's tax bill

Pension payments
Payments into a pension scheme qualify for tax relief. A quarter of your savings can normally be taken as a tax-free lump sum.
When you start to draw the rest as a pension this is taxed as income, so you have effectively deferred tax rather than avoided it .
But big savings can still be made by those who pay income tax at 40pc during their working lives and then pay tax at a lower rate when they retire.
If you are a higher-rate taxpayer and save outside a pension scheme, you will pay 40% tax on your earnings.
However, if you pay into a scheme and your eventual pension income falls to below the higher-rate tax threshold (£34,800 after allowances for 2008-09), those earnings will be taxed at only 20% or less

Child trust fund
If you transfer money to your children and this earns more than £100 a year in 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 as  (CTF). interest paid on money in a CTF is tax-free.
You can put in up to £1,200 a year for your child.
 If you want to save more than this, then you could put the extra money into an ordinary savings account.
Providing the interest generated by this is less than £100 a year, there is no tax to pay.

Carry forward losses
If you are self-employed, or earn taxable income from renting out property, you can cut the amount of tax you need to pay by carrying forward losses from previous years.
Imagine if last year, as a self employed person, you had a bad year and made a loss of £4,000. This year, things improved and you made a profit of £25,000. Carrying the loss forward reduces the taxable income to £21,000 and cuts £800 from your current tax bill.Visit www.which.co.uk/advice/tax-andwork/working-for-yourself for more information.


BOOSTING YOUR PENSION WITH ONE PHONE CALL
John Pellatt retired in April 2007. Having notified HMRC, he started to receive his state pension and income from his main workplace pension tax-free.
However, his income from two other pension schemes was taxed at source. At the end of the tax year, John received P60s from each pension provider and discovered that he had been overcharged tax.
"I telephoned my tax office in Scotland," he told Which? Money.
"It confirmed that it now had full details of payments made to me and of tax deducted. The tax office said this information can be obtained by any tax office on computer as long as they have your national insurance number."
John was told a refund would be calculated and forwarded to him as soon as possible.
He received a cheque for £179 within seven days and is pleased that the system worked so well. Next year, his tax code should be adjusted so that no overpayment occurs.


OTHER TAXES YOU CAN CUT DOWN TO SIZE
As well as reducing your income tax bill, there are other taxes you can reduce or avoid:

Stamp duty
Until recently, stamp duty was payable at 1% on property sales of over £125,000. The threshold has been raised to £175,000 as a temporary measure. If you buy a house costing £174,000 before 3 September 2009, you will pay no stamp duty.
If you miss the September 2009 deadline, you will pay stamp duty of 1% on the full value. By taking advantage of the Chancellor's amnesty, you could save yourself a maximum of £1,740.

Excise duty
By buying wine when you are abroad you avoid excise duty, which makes UK wine prices far higher than their European counterparts. Each bottle of wine costs £1.46 in UK duty, while in France the rate is 2p.
If you're a wine lover, buy a case of 12 bottles when you are in France and you could save at least £17 in tax.

Car tax
You can pay less for your tax disc by switching to a low-emission vehicle. The most expensive category, with CO2 emissions of over 225 g/km, costs £400 a year, while the cheapest (up to 120 g/km) is only £35 a year.
Switching from a Range Rover to a Toyota Prius Hybrid could save you £365 tax a year.


HOW TO GET YOUR MONEY BACK
WHEN TO PAY TAX
There are ways to hang on to your cash, but don't be late
Most people pay tax directly, when it is deducted from their pay.
If you are self-employed or complete self-assessment tax return, you are required to make *payments on account'. These are based on your income from the previous tax year.
If you expect to earn less than you did last year, make sure you reduce the figure, or you'll end up overpaying and having to claim tax back. Don't underestimate your income as HMRC charges interest on the difference if you underpay.
An expensive mistake is to miss the deadline for making a tax return.
Paper returns now have to be
submitted by 31 October, while the deadline for filing online is 31 January.
It is better to estimate figures than put off making a return. You can be fined £100 for being late.

HOW TO RECLAIM TAX
If you've overpaid, here's what to do:
Code error
If there's an error on your code, you can get the overpayment refunded by contacting your employer's tax office.
It will normally adjust your code, so that any overpayment is refunded through your wages. You can claim back overpaid tax up to five years and 10 months after it was deducted and have this refunded or offset against other tax you owe.
Savings income
You might have had tax deducted at the standard rate of 20%, when it was only due at 10%, or not payable at all because your total earnings, including savings, were less than your personal allowance.
You can get this refunded simply by completing an R40 form and sending it to your nearest repayment office.
You can claim up to five years and 10 months after the end of the relevant
tax year.
National insurance
If you have continued making NI payments after reaching retirement age, or overpay because you are both employed and self-employed, you can reclaim these. To do this, contact the National Insurance Refunds Group (see *Contacts').
Appeals
If you think a tax decision by HMRC is wrong, you should appeal within 30 days of receiving the disputed notice or award. If you are unable to reach agreement, you can appeal to an independent tribunal of general commissioners.


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