Now that the 2011 deadline has passed for completing your paper tax return, here are 10 simple points to consider for next year. Planning your tax arrangements in advance can cut down the total amount you’re expected to pay.
1. Check your tax code
Most people should get a tax-free allowance of £7,475 for 2011-12 and receive a code that reads 747L. Those over 65 may get more, while those who have received taxable benefits in kind, or owe tax from previous years get less. Check your tax code carefully to make sure you are not paying too much.
2. Married couples can save on CGT
For 2011-12, capital gains tax (CGT) is only payable on gains over £10,600. This is an individual allowance, so by sharing the ownership of items that they sell married couples and civil partners can claim £21,200 between them. If ownership is restricted to one partner, they get only £10,600 tax-free.
3. Some owners of second homes can save CGT when they come to sell
Although capital gains tax (CGT) is levied on the sale of second homes, you can reduce the amount payable by three years’ worth of gains provided you have used the property as your main home at some point in the past.
4. Pay less tax by spending on expenses
If you’re self-employed you can cut your tax bill by claiming for allowable expenses. These reduce the profits on which you are taxed. You can normally claim for a share of office expenses if you work from home, the cost of travel if you go on business trips and other overheads such as postage and stationery, legal and accountancy fees and professional subscriptions.
5. Bad years can be put to good use
The self-employed can cut their taxable profits by carrying forward losses from previous years. A year’s losses can be carried forward indefinitely until they have been offset by subsequent profits. Alternatively, you can carry back losses in the current year and offset them against profits chargeable to income tax in the previous tax year.
6. Taking a pay cut can reduce your tax bill
Employees can cut their taxable pay by joining an employer’s salary sacrifice scheme. Typically these reduce your gross pay but make up the difference with childcare vouchers, or other benefits in kind.
7. Pension contributions get tax relief
Joining an employer’s pension scheme can cut your tax bill. Pension contributions get tax relief at 20% if you’re a basic-rate taxpayer or 40% if you are a higher-rate taxpayer.
8. Interest paid on savings in a cash Isa is tax free
For a basic rate taxpayer, this can boost what you receive from 2.4% to 3% for example, or for a higher-rate taxpayer it gives 4%. Gains made on stocks & shares Isas are also tax free, although you can’t reclaim the 10% tax credit that is deducted from dividends. The Isa limit for 2011-12 is £10,680, you can put up to £5,340 in a cash Isa and the rest in stocks and shares or the full £10,680 in stocks and shares.
9. Making gifts can cut your final tax bill
Inheritance tax (IHT) is charged at 40% on all estates over the individual nil-rate band of £325,000. You can reduce your liability by making lifetime gifts (called potentially exempt transfers- PETs). If you die more than seven years later they are not counted as part of your residual estate. Even after three years, your IHT liability begins to fall.
10. Married couples benefit under IHT rules
Since 2007, beneficiaries have been able to cut IHT by using any unclaimed nil-rate band of the first partner to die as well as that of their spouse. This effectively doubles the nil-rate band for many couples to £650,000, lifting many estates out of IHT altogether. If the first partner has used some of their allowance the remaining percentage can be claimed, in addition to that of the second. Unmarried partners do not enjoy the double allowance.