The UK Government actively tries to steer your behaviour by offering tax breaks and tax free allowances. Exploit these incentives to maximise your personal gains:
| 2008-2009 (tax year 6 April - 5 April) | Comment |
Individual tax free income allowance from employment and self-employment £5435. And if you employed only and earn less than £4,825 (tax year 2008 to 2009) you do not have to pay National Insurance contributions. | Set up your own part-time one-man small business to generate this level of income. If you have a partner, they can do the same. If you are self-employed rather than employed you will need to pay annual NI contributions of £119.60. |
Zero capital gains tax on sale of primary residence property | Work your way up the property ladder, one property at a time, by adding value to your home. A 2nd or 3rd property is liable for 18% capital gains tax on sale. |
Zero capital gains tax on ISAs | Take up the maximum annual allowance of £7200 per person by investing in a maxi ISA of funds or shares. If you have a partner, they can do the same. Once it's in the ISA wrapper, any drawdowns are tax free - just beware that the tax free protection does not apply if you die and pass it down as inheritance. If you choose a cash only ISA the limit is £3600. Those aged 16-17 can only invest in a £3600 cash ISA. |
Zero capital gains tax on the sale of your car | If you own a car that is heavily depreciating or a high fuel consumer, sell it and downgrade. If you own more than one car, consider managing with just one. For the cheapest cars to run see here for petrol and here for diesel. |
Zero capital gains tax on personal belongings worth £6,000 or less when you sell them | Sell off items from round your home that are largely unused or dormant. |
| Zero capital gains tax on gambling gains | PTS is not an advocate of gambling in its traditional form, as it is a fairly sure-fire route to losses. However there are currently two loopholes to exploit: matched betting and casino bonus-bagging. Both are systematic routes to gains without the risk inherent in traditional gambling. An individual can target making £6000 per annum tax free, a couple £12000. |
Individual annual capital gains tax exemption of £9600 | Use for gains from trades that are not ISA-wrapped - in shares, funds, bonds, commodities, non-primary property. If you have a partner, they can do the same. |
| Zero inheritance tax on estates up to £312,000 | See section below: "How to reduce inheritance tax to zero". |
| Tax shelters: Index-linked saving certificates up to £30,000; Premium Bonds up to £30,000; Enterprise Investment scheme up to £500,000; Venture Captial Trust up to £200,000. All tax-free. | National Savings & Investments, the government-backed agency, offer various savings and invesment vehicles that have a special tax-free status (no income tax, no capital gains tax). The best return is provided by their 3 year and 5 year index-linked savings certificates, that pay Retail Price Inflation plus 1.35% fixed for 3 or 5 years (ensuring your money is always making a positive real return). That currently equates to 5.75% which isn't far off the leading savings rates out there. Your money is tied up for the 3 or 5 year term - but the gains are completely tax free. You can invest up to £15,000 per year in each certificate, giving you a tax-free annual option of £30,000, assuming you have already used your ISA allowance. Anyone aged 7 or over can invest, but they can also be bought on behalf of under-7s by parents. The other tax-free vehicles offer varying limits and varying risk, but ample scope for you to steer large amounts away from the taxman should you reach that level of wealth. |
The rent-a-room scheme allows you to let part of your home and generate a tax-free income of up to £4,250 a year. This equates to a monthly rent of just over £350. | The government doesn't distinguish between homeowners and renters. As long as your landlord agrees, there's no reason why tenants shouldn't benefit by taking in a lodger too. Try MondaytoFriday for a room-share agency specializing in weekday lodging only. |
| Tax-effective giving enables the charity and/or the donor to reclaim tax on gifts to charity. Using Gift Aid means that for every pound you give, the charity you are supporting will receive an extra 28 pence from the Inland Revenue. | Give the charities of your choice a Gift Aid declaration. This involves completing a short form or just giving basic details to the charity over the phone or the internet. To qualify for Gift Aid, what you pay in income tax or capital gains tax must at least equal the amount the charity will claim in the tax year. If you're living the tax free system you are still directing where your money goes, rather than the Government. |
For a couple, there is an annual tax free allowance pot worth £48000 to exploit, excluding any tax-free gains made from trading property, cars or possessions. On top of that, build up a fully ISA-wrapped shares and funds portfolio and draw down from it tax-free. This is not tax avoidance - this is simply making full use of the goverment's incentives. You can then choose which causes to distribute some of your money too - without the government dictating it - so the non-profit sector does not lose out.
National Insurance Rates 2008-2009
Class 1 (not contracted out) | Lower earnings limit £90; Payable on weekly earnings £105.01-£770: 11%; Payable on weekly earnings over £770: 1%; Over state retirement age: Nil |
Class 1a (on relevant benefits) | Nil |
Class 2 (self-employed) | Exempt up to £4825 earnings per annum, thereafter £2.30 per week |
Class 3 (voluntary) | £8.10 per week |
Class 4 (self-employed on profits) | £5435 - £40040: 8%; Over £40040 1% |
Income Tax Rates 2008-2009
Basic rate tax up to £36000 | Non-savings rate 20%, savings rate 20%, dividend ordinary rate 10% |
Higher rate taxable income over£36000 | Higher tax rate 40%, dividend upper rate 32.5% |
Personal allowances that reduce taxable income | Under 65 £5435; 65-74 £9030; 75 and over £9180; Blind person's allowance £1800 |
How to reduce inheritance tax to zero
Inheritance tax is charged at 40% on your estate (all money, shares, houses, land, business interests etc) when you die, over and above a £312,000 threshold. As house prices have shot up over the last decade, many people now exceed the threshold on their property alone. Your kids or beneficiaries may therefore face a hefty inheritance tax bill.
However, with a little planning you can potentially reduce inheritance tax for your children to zero. Below we demonstrate how a couple could pass down a £1million estate completely tax-free, saving a whopping £280,000 inheritance tax.
1. Get Nil-Rate Band Trusts inserted into wills for you and your partner: IHT free threshold potentially rises to £600,000.
You may be aware that there is an 'inter-spousal exemption' for inheritance tax that means if a spouse or partner dies their entire estate is passed tax-free to the surviving spouse or partner, so zero tax. Many people make use of this due to its initial tax-free appeal. So, the husband dies, the estate passes tax-free to the wife, the wife then dies, and the kids have to pay inheritance tax on anything over and above £300,000, as it is then one person's estate. Be aware that the £300,000 allowance is per person. The partner or spouse who died first effectively gave up their £300,000 allowance. To use both allowances, you and you partner can make individual wills, equally dividing ownership of your assets and stating that you both want £300,000 of assets to be passed to your children. They get £600,000 of assets tax-free, rather than £300,000 tax free and a £120,000 tax bill on the second £300,000. The drawback of this is that when the first partner dies, the kids inherit £300,000 leaving the surviving partner perhps facing an income problem or having to sell the family home. The solution therefore is a 'nil-rate band Discretionary Will Trust' whereby the first-deceased partner's £300,000 is placed in a trust on their death, rather than going straight to the kids. The surviving partner can still draw income from the assets in trust or remain in the home as before if it is property, keeping their situation unchanged. Yet when they then die the children get both partners nil-rate allowances and inherit £600,000 tax-free. So, get Nil-Rate Band Trusts inserted into your wills. Married and unmarried couples can both take advantage.
*Update 9/10/07: Chancellor Alistair Darling has delivered his first pre-Budget report. From today married couples - and people in civil partnerships - will have their joint inheritance tax thresholds lifted from £300,000 to £600,000, because a surviving spouse, or civil partner, will take on their other half's unused inheritance tax allowance. This means there is no need to set up a will trust as detailed above - any unused allowance from the first partner's death (normally all assets pass to the spouse and no allowance is used) will be transferred to the surviving spouse.
Whatsmore, this new rule will be back-dated indefinitely for three million widows and widowers.*
2. Gift £3000 each year to your kids once you retire, rather than all at death, and your partner likewise: IHT threshold potentially up to £720,000.
Each year you are individually allowed to give away £3000 tax-free as gifts, or £6000 if you made no such gift in the previous year. So a couple could gift £6000 to their children tax-free per year once they retire, say for the last 20 years of their life, passing down £120000 tax-free and reducing the taxable estate on their death. NB: Parents can also give £5000 to each of their children tax-free as a wedding or civil partnership gift.
3. Make a one-off gift, or set up a gift trust, at least 7 years before you die: IHT threshold potentially up to £800,000.
You can make other gifts to your children and which become IHT-free IF you go on to live a further 7 years. You can gift a cash lump sum, shares, property, pretty much anything and to any value, SO LONG AS you no longer continue to benefit from the asset. So, for example, giving away the family home but continuing to live there would not be eligible. These gifts are called Potentially Exempt Transfers (PETS), and are clearly a tax-gamble if undertaken in very old age, so consider them early in retirement. Maybe downsizing your property from the big family home releases more equity than you require, and your finances therefore allow an £80,000 cash gift to your children early in retirement, safely protecting it from tax, rather than as part of the taxable estate at death. Alternatively, if you need to draw an income from the money but do not think you will need the capital, set up a discounted gift trust in your kids' names. You fix the income until your death, and again this has to be set up at least 7 years before you die for the trust capital to then become tax-free for your children.
4. Invest in AIM stocks, commercial forest, or land that you actively farm at least years before you die: IHT threshold potentially up to £1,000,000.
Invest in AIM (Alternative Investment Market) shares and keep them for at least 2 years and they become inheritance tax-free. The FTSE market has the bigger, safer blue-chip companies, whilst AIM has the more risky and volatile shares. Pick well though, and the higher risk can be rewarded with a higher return than FTSE companies. Note that shares in AIM businesses that engage in substantial non-trading activities, such as property, finance and mining companies, do not qualify. If AIM shares don't appeal then the minimum-2-year rule also applies to investing in commercial forest or investing in land that you actively farm (or profit-share with a farmer). Invest in any of these options at least 2 years before you die and the holdings will pass to your children completey free of IHT. So, for instance, deep into old age you could take advice on a portfolio of safer AIM stocks and invest the bulk of your remaining taxable estate in them, maybe £200,000, allowing your kids to inherit them after your death tax-free and then sell them gradually using their individual annual capital gains tax free allowances.
VAT
VAT is a tax on consumption, so in simple terms, consume less and pay less tax. Remember, companies are out to make a profit out of you - no matter how they dress it up. Marketing aims to make you feel dissatisfied about some aspect of your life. Products that need advertising are products that no-one needs. And the pursuit of 'stuff' (material consumption) is always at someone else's expense, due to the world's finite resources - unlike the pursuit of knowledge, which is attainable by all at no-one else's expense. Our free national libraries are a real asset. We hope we will see free internet for all in the near future. There is no tax on the pursuit of knowledge and learning.