Death and taxes – two certainties in life. But while you can’t avoid tax – unless your name is Donald Trump – you may be able to reduce the amount you pay. Indeed, millions of us may be paying too much to the taxman without even knowing it. Here are some of the most common reasons – and a few ways to reduce your bill.
Being self employed
More and more of us are becoming self employed. Sometimes it’s through choice; sometimes we’re forced by circumstances. Either way, experts predict that in a few years’ time, as many as half of UK workers could be working for themselves. That’s important because working for yourself involves big changes in the way you pay tax. In particular, you don’t get this done for you through PAYE and secondly there are all sorts of things you can claim back.
The problem is that with so many people coming into self employment for the first time, many do not understand what they are entitled to, which means there’s every chance you might be paying more to HMRC than you should be.
You can claim back for things, such as:
- Utilities: If you use your home for business purposes you can claim back a portion of this against tax. The same goes for broadband and phone. You can claim back any business calls you make and set a portion of your line rental and broadband costs against the business.
- Rent and mortgage: Again, if you work from home you may be able to claim for a percentage of your rent or mortgage income. As a guide look at how much of your home is set aside for work purposes.
- Computers: Do you have a computer which you only use for work? If so you can claim the whole cost. If you use it for both work and fun, you may claim a part of it.
- Clothing: If you need specialist clothing for your job then you should be able to claim this back. However, if you work in regular clothes then it’s unlikely you’ll be able to claim for a new suit, for example.
It is important to only claim for what you can. For example, entertainment is now a non-allowable expense. So, if you are entertaining clients, you will still have to pay for this out of your own pocket.
Temporary tax codes
Thousands of people pay too much because they are in the wrong tax code. This is how HMRC tells your employer how much money to deduct from your wage packet every month. You should be able to find this on your annual P60 and correspondence with HMRC. Most are made up of a few numbers and a letter. The most common is L which is for people who are paying the basic tax and normal personal allowance; P is for people aged between 64 and 74 and are entitled to the full personal allowance while T represents a temporary tax code. This is the code the government gives you while it calculates how much tax you should pay.
The 'T' code means that the tax you pay is generally much higher than the basic rate, so if you’re on this you could be paying more than you should be. Make sure you know your tax code as you could be due a rebate. You’ll have to go chasing this yourself, as HMRC are unlikely to fall over themselves to repay tax.
It always seems unfair that we get taxed on our savings, especially given that rates have been at near-historic lows in recent times. To make matters worse, many people could be paying more than they should be without knowing it. The last few years have seen the government push up the rate below which people pay no tax which includes a small increase on the 10% savings band. Unfortunately, the banks do not do this automatically. They will tax savings at the regular 20% rate unless you complete an R85 form. Once you’ve completed this, the bank will start paying interest in full.
Spreading the income
You can reduce your tax liabilities by spreading the income you earn amongst members of your family. For example, you could employ your partner in your business. If his or her income is lower than the minimum threshold, they would pay no tax on this income. You could also do this with children who are older than 16. Put them to work in the holidays and pay them a small wage. It gives them a job and it helps you out too.
You will have to provide evidence of these payments and also prove that they are appropriate. So, just paying someone to do nothing would be considered a big no-no.
You should continue to spread income once you pass retirement. It can be inefficient to have all the income coming through one person – often at a higher rate. Alternatively, you could set up a separate pension for a partner so they receive a portion of the income.
These are just some of the ways you could be overpaying tax. The system is extremely complicated (some would say too much so) but there are all sorts of ways you could reduce the amount you have to pay HMRC. Get advice from an expert who can provide guidance on how much you are paying and how you can reduce the burden.