Paying your correct taxes is obviously very important. Without a fair and reliable taxation system society would rapidly deteriorate. When we think of the welfare state we must remember that it is the taxpayers who are financing all public services. A combination of corporate tax, income tax and VAT is used to fund every part of state spending.
However, while it is vital that everybody pays tax, it is equally important to businesses that they only pay their fair share and avoid paying more tax than is required. There are many opportunities for businesses, sole traders, contractors and employees to reduce their tax bill. Here we will look at some important ways to make the most out of your tax.
Check your PAYE Code
If you are on PAYE and your circumstances have changed you should check with the HMRC that you are on the correct code. The HRMC website provides advice on tax codes and what they mean. Your payroll department can also advise.
Use your Personal Allowances
If you are earning and your partner is not you can transfer some of your income to your partner. If you transfer an amount equal to their personal allowance no tax will have to be paid. So long as the payment is a gift and is not a payment for services.
Spread the Income Tax Rate
Again, this is only possible between partners. If one partner is not using their tax allowance, other sources of income, such as shares, bank deposits and property lettings can be transferred to their name. These earnings, up to their tax allowance, will no longer be subject to any tax.
Pay into a Pension Plan
Money paid into your personal pension plan is not taxable up to a certain limit. This is an excellent way to reduce your tax bill today and to start saving for your retirement at the same time.
Invest in an ISA
All money invested in an ISA is free from capital gains tax so any income that you earn on interest is not taxable. The more money you have locked up in an ISA, the greater your tax savings become.
Check your Company Structure
It does not matter if you run a large business or are a sole trader, it is important to check how your finances are managed to ensure that you are always operating in the most tax efficient way.
Rules and regulations are amended and updated every year so the advice received from an accountant five years ago may not be as relevant today. There may be more savings to be made and new ways to structure a business. For example, for contractors it is very tax efficient to make use of umbrella companies. These companies will act as your employer and pay you a salary through the PAYE system. Contractors send timesheets to the umbrella company who then in turn send an invoice to the client.
There are many ways to reduce your tax bill and a good tax consultant can help you to optimize your earnings.