Use these money-saving investment ideas to avoid paying too much tax and keep those pennies in your pocket.
Paying tax is (unfortunately) a necessary part of life, but there are ways that you could make tax-saving investments. By ensuring that you are making the most of existing investments, tax planning and making a few small changes to the way you manage your money, you could make significant tax savings each year.
“You can invest in a wider range of shares through a venture capital trust. This gives a tax reduction of 30 per cent of the amount invested, up to £200,000”
1. Think as a family, not as an individual
We all pay tax on our own individual earnings and assets. But thanks to a number of reliefs and allowances offered to married couples and civil partners, it is possible to reduce the total amount of tax you pay as a couple if you arrange your finances correctly. This, though, works only if one partner pays a lower tax rate.
It can make sense to switch income-producing assets, such as shares, investment funds, bank and building society accounts and jointly owned property, into the name of the partner who pays the lower rate of tax. This way, you pay less tax on dividends, rent and savings interest.
The general rule that jointly owned income is taxed 50/50 can be altered by making a specific election where there has been a genuine outright gift of assets, But beware, if you are unmarried and transferring assets, this could potentially trigger a capital gains tax (CGT) bill.
2. Check your tax code
The problems with HMRC’s computers have led to many people paying the wrong tax through their tax code. Even if you are not one of the millions of taxpayers who received a letter saying tax has been over or underpaid, it’s worth checking your tax code.
3. Sacrifice your salary
It’s possible to give up part of your salary in return for other non-taxable benefits, such as pension benefits. That way you can keep the same take home pay, as you would be paying a contribution to the pension anyway, but increase your pension contributions by the NI savings.
In addition, your employer will be saving 12.8 per cent employer NI contributions. These savings should also be passed on to you, giving a further increase in your contribution.
4. Don’t forget the basics
Many people simply don’t know the basics of how to save tax in the UK as they fail to maximise pension and ISA savings.
- Everyone can shelter up to £11,520 in an ISA – of which half can be in cash
- A couple can effectively invest £20,400 a year, on which they pay virtually no tax on income or growth
- It is possible to make a pension contribution of up to £50,000 this year (and possibly more in some circumstances)
- If you are a higher rate taxpayer the tax man contributes up to 40 per cent of your contribution
- Even if you or your spouse are a non-earner, you can still put up to £2,880 into a pension and get a whopping contribution of 20 per cent from HMRC!
5. Consider tax-efficient investments
Investors can make a bigger dent in their tax bill by putting their money in an enterprise investment scheme (EIS) or venture capital trust (VCT). Both are designed to encourage private investment in smaller companies.
Buying shares in a qualifying company gives a reduction in tax of 30 per cent, so a £10,000 investment means a £3,000 reduction in that person’s tax bill.
The maximum investment therefore wipes £100,000 off your tax bill. The shares are free from capital gains tax and inheritance tax.
You can invest in a wider range of shares through a VCT. This gives a tax reduction of 30 per cent of the amount invested, up to £200,000.
A £10,000 investment would knock £3,000 off your tax bill, the maximum investment cutting your tax by £60,000.
Of course, the risk is that these investments do not perform well and the losses outweigh any tax saved.
Takeaways – how to save tax
- Know what taxes you should and shouldn’t be paying
- Use the unbiased.co.uk tax waste calculator to work out how much tax you could be wasting
- Maximise your ISA and pension payments
- Read more about the unbiased.co.uk TaxAction 2014 campaign
- Consider your family’s tax rate, not just yours, when managing your assets
- Investigate tax-efficient investments, but beware of the associated risks
- Read more unbiased.co.uk articles on saving tax
About the author
Alan Smith is the CEO of Capital Asset Management. His specialisms include: wealth management, strategic financial planning and creative tax planning.
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.