|
Whether you pay the basic rate tax or a higher tax rate on your income, paying income tax is still an unpleasant experience for every worker in the UK. Although taxes are inevitable, though, there are legal strategies you can use to reduce the financial impact of your tax obligations. Of course, people who pay the basic rate will have fewer opportunities to save than employees and business owners in higher brackets; however, there may still be tax-reducing opportunities available. Make sure you take advantage of all available personal allowances. If you work for a traditional employer, the standard personal allowance based on your birthdate will likely be factored in for you; however, it is important to make sure you are getting this benefit. If you work for yourself or own a business that employs others, you will need to claim personal allowances on your tax forms. A personal allowance is an amount of your earnings that is not subject to taxation at the basic tax rate or higher rate. If you earn less than the maximum amount of the allowance, you will not have to pay income taxes at all. If you earn more than the personal allowance threshold, you will only have to pay taxes on the earnings above the allowance amount. Suppose, for example, that you are a 25-year-old employee who earned £20,000 in wages last year. Because you are eligible for a personal allowance of £9,440, you would only pay income taxes on £10,560 of your income. If you are blind, you can claim a second allowance in addition to the standard personal allowance. The blind person's allowance increases your exemption amount by £2,160. Using the above example, the blind person's allowance would lower your taxable income to £8,400. Consider the ownership of income-producing assets. If you own a rental property or a business that produces income, the profits you derive from these sources can push your income into a higher tax bracket. Although you may only earn enough from other sources to keep you in the basic rate bracket, which imposes a tax rate of 20 percent, your income-producing assets could put you into the higher tax bracket. Moving into the higher tax bracket would mean that you would have to pay 40 percent on all earnings above the basic rate threshold. If the income from these assets pushes your income to more than £150,000, you would have to pay taxes at the additional tax rate of 50 percent. If your spouse's income is low enough to remain in a lower tax bracket with the addition of income from assets, you could consider transferring ownership of the assets to avoid additional tax liability. For example, suppose that you have rental property that produces £30,000 in income and that your income from all other sources is £140,000. If you retain ownership of the rental property, your total income would be £170,000, which means that you would have to pay a tax rate of 50 percent on £20,000 of the income. If your spouse earns £100,000, though, you could transfer ownership and keep the full £30,000 of your rental income in the 40 percent bracket. Choose an ISA for savings interest earnings. If you place your money in a standard savings account, the interest you earn will be taxed at a rate of 20 percent when you withdraw the funds. If you place the money in a cash ISA or an investment ISA, though, your interest earnings will not be taxed. Choosing an ISA gives you the opportunity to grow your savings through interest earnings without incurring the costs of savings taxes when you receive the funds to supplement your retirement income or pay for future purchases. If you decide to place your money in a standard savings account, you cannot fully avoid savings taxes unless your income is below your personal allowance threshold. You can delay the payment of taxes on interest earnings, though, by leaving your money in the account for as long as possible. As long as you do not make withdrawals from your account, your contributions and interest earnings will continue to grow on a tax-free basis. This allows you to earn as much as possible from your savings before you have to pay taxes on the earnings. If you want to know more about basic rate tax or any other tax related issues Sam Jones the author of this article suggests visiting the help pages at uSwitch.com.
Related Articles -
reducing taxes, basic rate tax, tax benefits, tax efficient investments, capital tax gains, ISAs,
|
