Tax avoidance has made plenty of headlines this year. The latest highly paid celebrities accused of sheltering millions through aggressive tax avoidance schemes include Anne Robinson, the BBC Watchdog presenter, and Gary Barlow of pop band Take That. But there are plenty of ways to avoid tax legally, simply and without raising accusations of "moral repugnance". Here are six tips for you to consider whatever your earnings.
1. Reduce NI through salary sacrifice
Earning band: typically £25,000+ but can be advantageous for most people
Potential saving: potentially hundreds, or possibly thousands for higher earners
Workplace salary sacrifice schemes mean you can save for the future while reducing the amount of national insurance (NI) you pay - meaning you get to pocket more of your salary each month. It works by you giving up part of your wage to receive an equivalent value of non-cash benefits that you don't have to pay income tax on, such as pensions, additional life cover, health screening, childcare vouchers, bikes for work and buying additional holiday.
Contributions through salary sacrifice can also be used to bring income under tax thresholds, and pension contributions through salary sacrifice come with the added possibility that your employer may boost the pension contribution by adding part, or all, of your NI saving. Not all companies offer salary sacrifice schemes, but you can ask your HR department if you’re not sure your employer offers one.
2. Put savings in non-tax paying partner's name
Earning band: where one partner has income less than £8,105
Potential saving: up to £1,620
If you're a non-taxpayer, make sure you don't pay tax at source on your savings. If you don't pay income tax or have a non-tax-paying partner, you can also avoid paying the usual 20 per cent tax on the interest on your savings. Banks and building societies automatically deduct 20 per cent income tax from the interest on your money, so you need to be on the ball and request to become exempt. You can get the interest on your savings paid gross (without tax deducted) by completing an R85 form. You can download these at http://www.hmrc.gov.uk/forms/r85.pdf or call Her Majesty's Revenue & Customs (HMRC) on 0845 3000 627 to request one for yourself or your partner.
3. Use a pension to dodge the new child benefit tax
Earning band: over £50,000
Potential saving: £1,752 for a two-child family
From January, the government has decided that parents earning more than £50,000 a year will be taxed on the child benefits they receive. Limiting child benefit to low-income families has been part of the government's austerity drive - but if you're a middle earner you don't necessarily have to fall prey to this.
The new rules mean that for every £100 you earn above the threshold (up to £60,000), 1 per cent of your child benefit will be deducted. If you earn more than £60,000 the charges have been formulated so that they will be equal to the benefits you receive. In other words, there's no point in you claiming because you'll have to pay it all back in tax.
Next year, when the rules apply for the full year, for a higher-rate taxpayer with two children the new rules could effectively slash your pay by £2,920.67 gross a year - by retracting £1,752.40 in annual tax-free child benefits.
But there's a way to get around this which could actually bolster your nest egg. By contributing earnings above £50,000 into a pension scheme, you will not only receive 40 per cent tax relief on your contribution, but also restore the advantage of the child benefit by nullifying the tax charge because your pension contribution no longer counts as 'income'.
Vince Smith-Hughes, head of business development at Prudential, said: "Child benefit is a very valuable relief to hundreds of thousands of parents. This planning exercise is a very helpful way of dealing with a short-term problem by saving more for the long term."
4. Beware of losing tax relief if you're boosting your pension near retirement
Earning band: over £45,000
Potential saving: thousands
If you're approaching retirement with cash to spare you might well be paying extra contributions to boost your retirement savings. But if you're a middle earner you need to watch out for a trap that could prevent you receiving full tax relief on part of your contributions.
As a higher-rate taxpayer you can receive 40 per cent relief on pension contributions; additional rate taxpayers can enjoy 50 per cent. But if you effectively reduce your income below the higher rate income threshold by paying too much into your pension, part of your contribution will only get 20 per cent tax relief. But the good news is you can prevent this by spreading the contribution over a number of years.
Take, for example, a higher-rate taxpayer earning £70,000 who, looking to boost their pension, pays in £50,000 as a contribution - effectively reducing their taxable income to £20,000. As some of this is relieved at 40 per cent and some at 20 per cent, the overall tax relief given would usually be around 31 per cent. But if they were to spread the contributions over two years (bearing in mind they also need the earnings to justify it) then it's possible to receive 40 per cent relief on the whole contribution because their income would never drop beneath the higher earner threshold.
5. Bring forward contributions ahead of new 45 per cent tax relief cap
Earning band: over £150,000
Potential saving: 5 per cent of pension contributions
New tax rules being introduced in April will snip 5 per cent off higher-rate taxpayers' top tax rate. Planners are urging savers to bring pension contributions forward before the new rules come in. The reason for this? Quite simply, if contributions are brought forward to this year then tax relief will be given against this year's current 50 per cent rate.
The key here is to check if you have unused allowance from the previous three tax years and that your earnings in the current year support the contribution you want to make. For example, if you earn £250,000, and have an unused annual allowance of £125,000, you could pay gross contribution of £125,000 in the current tax year and get 50 per cent tax relief on up to £100,000 of it (£50,000 relief). If you were to make the same move in the next tax year, you would only get 45 per cent relief (£45,000), so you'd lose £5,000.
6. Reclaim personal allowance through your pension
Earning band: over £100,000
Potential saving: up to £9,726
Once you start earning more than £100,000 a year, HMRC starts eating into your tax-free personal allowance, which currently stands at £8,105. They take £1 for every £2 of your income above the threshold, up to £116,210, when they take the whole lot. And between these two amounts, the 'marginal' rate of tax is 60 per cent.
But you can 'reclaim' your personal allowance by paying earnings over £100,000 into a pension scheme. So say you earn £116,210 and you pay £16,210 as a gross contribution to a pension, you will effectively create a £16,210 pension pot at a cost of £6,484 because of the tax saving.
