The media has been full of news stories recently about aggressive tax avoidance, and how it is every taxpayer's duty to pay the right amount of tax. The reporting has been so slanted in some cases that almost any tax saving measure can begin to look illegal or immoral in the public perception. Nothing could be further from the truth. There are many legitimate ways to ensure that your tax affairs are in good health and it is incumbent upon all of us to carry out our own tax health checks on a regular basis.
For individuals in employment, it may feel as if there is little that can be done to mitigate liabilities to income tax. PAYE means that tax is deducted at source and few make an effort to check whether the right amount of tax has been paid, simply trusting the payroll operator and the Revenue to get the calculations right. In fact, mistakes do happen. Taxpayers should always check their tax codes each year to ensure that the Revenue makes the right deductions.
For those in self employment, ensuring that tax returns are completed correctly could also bring savings. The danger is not only in paying too much tax, but also in paying too little, as interest and penalties may then begin to run. It is important to get the return right in the first place. For spouses and civil partners, thought should be given to splitting income sources (for example, shareholdings) in order to ensure that income tax allowances and lower rate bands are fully utilised.
Capital gains tax
Individuals have a CGT allowance in 2013/14 of £10,900. It is sensible to carry out a review of investments and to consider realising gains up to that amount to ensure that the allowance is not lost. Spouses and civil partners should consider, where possible, transferring assets between each other before a sale, thus"doubling up" the allowance. Any CGT which does arise on a sale of assets in 2013/14 will not be payable to the Revenue until 31st January 2015.
Gifts to charity
Making gifts to charity – including to rugby clubs, where they are registered charities – can be a source of income tax relief where the Gift Aid scheme is used, increasing the value of the gift in the charity's hands at no cost to the donor. Donors can also secure tax relief under the scheme. Gift Aid is very simple, although many people do not appreciate how it works.
Most straightforward cash donations to charity are eligible for Gift Aid, if an appropriate declaration is made. For every £100 donated to charity under Gift Aid, the charity receives £125 (£100 donation plus £25 from the Revenue as tax relief). A higher or additional rate taxpayer should disclose Gift Aid donations in their tax returns to secure additional tax relief of their own. The result for a higher rate taxpayer is relief of £25, which makes the"cost" of the donation to the donor only £75 after relief. For an additional rate taxpayer the cost of the donation is even lower at £68.75.
Tax efficient investments
A further way to maximise tax relief is to make tax efficient investments. One of the simplest ways to do this is to fund an Individual Savings Account (ISA), which produces tax free income and gains. The maximum which can be invested in a cash ISA in 2013/14 is £5,760, or £11,520 in a stocks and shares ISA. Junior ISAs can also be created for children with up to £3,720, and again produce income and gains free of tax.
For savers willing to take more risk, there are opportunities for tax relief through Venture Capital Trusts and Enterprise Investment Schemes, both of which should only be undertaken with appropriate financial advice.
Taxpayers should also remember that contributions to pension schemes attract tax relief which will help to reduce the cost of saving for retirement. The annual contribution allowance is £50,000 but unused allowances for the three previous years can also be used. As the allowance is to drop to £40,000 in 2014, this year is a good year to ensure that this relief is maximised where possible.
Tailored tax planning
As every taxpayer's circumstances are different, it is important to obtain tax advice tailored to suit your individual needs. When doing so, it is also worth taking advice on Inheritance Tax and ensuring that wills and powers of attorney are in place and up to date. Failure to keep on top of your financial health can mean paying unnecessary tax and it is important to remember that there is nothing illegal or immoral about using tax reliefs and incentives within the rules. A tax and financial health check should become part of everyone's routine.
Gavin McEwan and Peter Littlefield are tax and succession partners at Turcan Connell, Edinburgh, Glasgow and London.
This article first appeared in SCRUM Magazine