Today is Tax Freedom Day, the day in the year when you theoretically stop paying over your earnings to the government, in various forms of tax and start working for yourself.
The exact date of Tax Freedom day is calculated each year by the Adam Smith Institute. This year they have revealed the average employee will have to work 150 days to cover their tax bill and things are getting worse. Successive governments have increased tax rates, gradually moving Tax Freedom Day to later in the year; in the mid 1960’s it fell on 2nd May, whilst last year it was on 29th May.
So, without employing an expensive band of lawyers and accountants, or turning yourself into Google or Starbucks, how can you reduce the amount of tax you pay and move your own personal Tax Freedom Day to earlier in the year?
1. Save tax free
Too many people still fail to use their Cash ISA (Individual Savings Account) each year. If you have savings and don’t hold them in a Cash ISA you are simply paying tax needlessly.
Anyone over the age of 16 can pay up to £5,760 into a Cash ISA in the current tax year. For a married couple that’s over £10,000 which can be saved each year tax free. If this was done each and every year, over say 10 years, that would be well in excess of £100,000 giving tax-free interest.
Whilst the one off hit of using your Cash ISA allowance in a single year might not be too interesting, the benefit really builds up for those people who use their ISA allowance each and every year.
2. Hold savings in your spouse’s name
Once you have used your Cash ISA allowance you should then hold any remaining savings in the name of the person who pays the lowest rate of tax.
If you pay tax at 40%, but your spouse is a 20% taxpayer, you should consider holding your savings in their name, it will reduce the amount of tax paid on the interest you generate.
3. Use National Savings & Investments (NS&I)
Unfortunately Index Linked Certificates, which provided a tax-free, inflation linked return, are no longer on sale. Those savers lucky enough to hold previous issues can still roll them over at maturity and should seriously consider doing so.
There is another other tax free option though from NS&I, Premium Bonds.
Beloved of millions of retirees, for most people Premium Bonds provide a pretty poor return, but if you are a higher rate taxpayer and want instant access to your savings, they can be attractive.
There is also the added advantage that no matter how much money you hold with NS&I, it is all protected, unlike other banks and building societies, who only have protection up to £85,000 per person per institution.
4. Invest tax efficiently
Investors should also use their annual ISA allowance to save tax efficiently. Too many people are not using their ISA allowance and are therefore paying needlessly paying tax.
Furthermore, once you have used your annual ISA allowance remember to use your annual Capital Gains Tax exemption. Everyone in the UK can make capital gains each year of £10,900 without paying tax, again this is an underused allowance and is often forgotten.
5. Make pension contributions
Pension contributions qualify for tax relief and are therefore one of the most tax efficient ways of investing. Put simply you can pay up to £50,000 or an amount equivalent to your earnings, whichever is lower, into a pension each year and qualify for tax relief. For a basic rate tax payer this means each contribution of £80 will have £20 added to it in tax relief. Higher rate tax payers can claim a further £20; making this a very tax efficient way of investing.
Sure, there are downsides to using pensions. You can’t access the money until you are 55 and then you have to create an income with the majority of the fund. However, for most people the aim of their pension is to create an income when they stop work, so these issues are not usually too much of a problem.
If you are not paying into a pension, you are missing out on valuable tax relief and also contributions from your employer, if there is a workplace pension which you have not yet joined.
6. Self-employed or Limited Company?
If you work for yourself you have a choice of how you trade, this usually boils down to a choice between sole trader, partnership or limited company.
Whilst each has benefits and drawbacks, for people who operate as a limited company there is the possibility of reducing their National Insurance contributions by taking dividends rather than salary.
There are other costs associated with trading as a limited company and these should be discussed with your accountant before you make a decision. But, if you do work for yourself, spend some time looking into the most tax efficient way of arranging your affairs.
Bring forward your own Tax Freedom Day
Everyone is different, but smaller amount of tax you can legitimately pay the better off you will be.
All of our ideas are simple, easy to implement and won’t land you in trouble with the taxman.
Our team of Independent Financial Advisers in Nottingham are experienced in making savings and investments work harder for you. If would like advice on your savings or investments call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org
The Financial Conduct Authority (FCA) does not regulate tax planning.
Investing in Pensions or Stocks & Shares ISAs involves an element of risk to capital. You may receive back less than your original investment.