What is Tax Freedom Day and what can taxpayers and small business owners do to reduce their tax burden? Jo Nockels explains…
Tax Freedom Day marks when taxpayers stop working for the Treasury and start working for themselves. The date is arrived at by comparing the UK’s GDP with all of the government’s tax receipts such as income tax, National Insurance, VAT, fuel duty, duty on alcohol and tobacco, council tax etc.
The date of Tax Freedom Day will vary from country-to-country and from year-to-year and this year in the UK it falls on 30 May, a day later than 2012. However, in the United States and Australia it falls much earlier – closer to the beginning of April.
Despite there being a significant increase in the personal allowance (your tax-free income) from £8,105 to £9,440 this year, the slight movement in Tax Freedom Day indicates that taxpayers are not significantly better-off this year.
So what can taxpayers and small business owners do to reduce their tax burden?
- Donations under the Gift Aid scheme
Donating to charity under the Gift Aid scheme extends your basic rate tax band so will shift more of your income from the higher rates of tax of 40 per cent or 45 per cent, back into the basic rate band of 20 per cent. This can save significant amounts of tax.
Despite the low interest rates, Individual Savings Accounts (ISAs) are still a popular option due to the interest being tax-free. For adult savers, the maximum investment in 2013/14 is £11,520.
Pension scheme contributions offer a tax-free regime for savings and significant tax relief for the investor, but there are caps to be aware of.
Business owners in the UK are faced with a difficult economic climate, so they need to think smart and keep ahead:
- Make sure you’re aware of the changes to tax relief for capital expenditure so that you don’t miss out
- Review your affairs to ensure they are as tax efficient as possible – such as your VAT registration or the treatment of your cars used for business purposes.
- Employers look to see if you are eligible for breaks such as the Employers’ National Insurance Holiday or grants for taking on apprentices
- File your tax return early! This avoids late filing penalties and allows you to budget for any tax payments arising
- Take a look at the unbiased tax calculator to work out the what tax breaks could be owed to you
Last year, 3.5 million people overpaid tax due to the PAYE system! So carefully check your tax codes which are being issued this month. If you spot an error, phone HMRC and get them to change it
- If you’re an employee, use form P87 to claim tax relief on employment expenses you have had to pay during the tax year, such as business mileage, costs for business trips etc
The Seed Enterprise Investment Scheme (SEIS) was launched in Budget 2012 and encourages private individuals to invest in small, young companies in exchange for a range of tax reliefs. There are criteria to adhere to but the SEIS scheme is one of the most generous tax breaks around so if you have surplus wealth and are looking to reduce your tax bill, it is definitely worth a closer look.
- Selling assets
If you have the potential for large gains from the sale of some your personal assets such as your share portfolio then it is important to utilise the annual capital gains tax exempt amount. For the 2013/14 tax year this is worth £10,900 per person. Any disposals within this figure are exempt from capital gains tax – and note, any unused allowance cannot be carried forward so make use of them while you can.
Historic dates for Tax Freedom Day in the UK
- 2009 – 24 May
- 2010 – 27 May
- 2011 – 28 May
- 2012 – 29 May (leap year)
- 2013 – 30 May