The taxman can be a hard taskmaster. But he can also teach you some valuable lessons in life.
As you fill in your tax return, you may be considering your finances and looking for ways to ensure that you don’t have to pay as much tax in the future. So, we have put together six lessons you can learn from your self-assessment tax return.
1. Giving to charity is good.
Especially if you do it tax-efficiently. You can support your favourite charity and cut your income tax bill at the same time. Anybody who pays tax at 40% or 45% can claim back the difference between the basic rate tax on your self-assessment form. The ISA allowance now tracks inflation and has risen from £11,520 to £15,000 for the 2014/2015 tax year as a result of the recent budget.
2. ISAs save you time as well as tax.
ISAs have a double benefit. First, they allow you to save up to £15,000 in cash or stocks and shares each financial year and take your returns free of income tax and capital gains tax. Second, you don’t even have to mention the tax saving investment on your self-assessment form. So you save both tax and trouble.
3. Saving tax is a family affair.
It’s good to share, especially if it helps you save tax. Your spouse or partner has their own ISA allowance and capital gains tax threshold. If they are in a lower tax band than you, you can save tax by shifting assets into their name. Or you can also claim income tax relief on contributions to their pension, even if they don’t pay tax. And don’t forget that you can cut your inheritance tax liability by making gifts to your loved ones.
Fact: Inheritance tax receipts are forecast to hit £3.3 billion in 2013/14.
4. Risk can be rewarding.
If you are willing to take a bigger risk by investing in small UK companies, you can claim some rewarding tax breaks. You can invest up to £200,000 in venture capital trusts (VCTs), or up to £1 million through the Enterprise Investment Scheme (EIS) and claim 30% income tax relief.
Fact: You don’t have to pay capital gains tax when you sell your VCT either. You can spread the risks of investing in an EIS by using a fund.
5. Losing money can save you tax.
You can claim tax relief if you dispose of any shares in a VCT or EIS at a loss. Similarly, you may be able to offset any taxable investment losses against any CGT you have paid.
Fact: You can carry forward unused losses indefinitely, provided you inform HMRC within four years from the end of the year of assessment.
6. The rules are always changing.
In April 2014, the maximum you can save in your pension over your lifetime fell to £1.25million. That is the second cut since 2012, when the ‘lifetime allowance’ was £1.8 million. If your pension pot exceeds the new, lower limit, you could face a 55% tax charge on any lump sum you draw, or if you take income, an extra 25% charge on top of any income tax. To keep ahead of every tax change, seek specialist tax advice now.
Fact: You may be well under the lifetime allowance now, but that could change. Someone 10 years from retirement with pensions totalling £700,000 will exceed their allowance if their funds grow at 7% a year, even if they stop making contributions now.
- Take a leaf out of the taxman’s book and donate to charity to reduce your income tax.
- Maximise the ISA allowances of both you and your family.
- Remember that risk can be rewarding when it comes to venture capital trusts.
- Keep on top of the changing rules so you don’t get caught out.
This article first appeared on the Capital website