Paying less tax

In the UK we paid £12.6 billion* in unnecessary tax in 2012. That's cash we could have kept with some smart financial planning. Here are some wise ideas to help you pay less:

Take advantage of ISAs

Use your ISA allowance of £11,880* for the tax year 2014-15 with up to half that in cash.

Build up an emergency fund with the cash component, and consider leaving the rest in equity funds to have the opportunity for growth, tax efficiently, for the years ahead.

Think about the whole family. Children have tax-free allowances too, and the Government introduced a Junior ISA savings system on 1st November 2011, with parents able to make capped contributions.

*Allowance applies from 6 April 2014 to 30 June 2014. From 1 July 2014 the allowance will be £15,000.

Make the most of your pension

If you're already paying into a pension, try to increase your payments as and when you can; or pay in a lump sum after a windfall, such as after a bonus or inheritance.

Consolidate existing pensions. You may benefit from having only one set of charges and less paperwork. If you've worked in a number of jobs, you may have two or three company pensions in your name. Track them down through the Pension Tracing Service.

Transferring is not suitable for everyone and there's no guarantee of a better pension. You should take advice before making any final decision.

Make use of both your allowances

You may be able to save on tax by sharing your Income Tax Personal Allowance with your spouse - the amount you can earn tax-free each year - between you. The 2014-15 limit is £10,000 per person.

Shift assets into the lower paid spouse's name, and pay income tax or capital gains at a lower rate.

Consider offshore bonds

Unlike UK onshore bonds, where you pay tax on your investment income and growth as they arise. With an offshore bond you won’t normally pay tax on any growth. Tax is paid when you cash in the bond and will be based on your circumstances at that time.

You pay tax when you cash in or sell, so do this later in life when you may be a lower-rate or non-taxpayer.

If you retire abroad, you could cash in your bond in a country where the tax rate is lower than in the UK.

Venture capital trusts

Consider investing in a Venture Capital Trust (VCT). A VCT is run by fund managers, which use the money to back companies to help them develop and expand. You can get 30% tax relief up to £200,000 on your investment,tax-free income and no Capital Gains Tax when you sell your shares.

VCTs are higher-risk investments. Think carefully before you commit your cash: ask yourself what level of risk you're comfortable with and can you absorb a loss?

It's important to think about tax-efficiency when you're saving or investing, but it's not a good idea to choose an investment purely on its tax breaks.

Important legal and regulator information

Laws and tax rules may change in the future. The information here is based on our understanding in April 2014. Your personal circumstances also have an impact on tax treatment. All figures relate to the 2014-15 tax year, unless otherwise stated.

Sources

* which.co.uk March 2012

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