Legally reducing a tax bill is completely legitimate. It is even sometimes encouraged through the use of certain tax reliefs and exemptions.
Indeed, the Government goes as far as to publish data documenting the cost to the Treasury of some of the hundreds of reliefs available.
Naturally, not all of these tax breaks are available to everyone, and some are only applicable in very specific circumstances. However, here are 16 perfect acceptable ways to avoid tax.
Read books, not e-books
VAT is payable on many of the items we buy, but newspapers, books and magazines are exempt. The government estimates that this relief cost around £1.5 billion in 2019/20.
Be careful though to buy a physical book, as this VAT relief does not extend to digital books read on a Kindle or other e-reading device.
Wear a bicycle helmet
In 2016, a major study of bike helmet use around the world from more than 64,000 cyclists found that helmets reduce the risks of a serious head injury by nearly 70%.
Wearing a helmet also gets cyclists a tax break, as they don’t pay any VAT on a cycle helmet. Motorcycle helmets and protective boots are also zero-rated for VAT.
Invest in wine
While many people choose to drink the wine that they buy rather than keep it in a cellar for investment purposes, you won’t pay any tax on the profits from selling a bottle of wine.
Wine is regarded as a ‘wasting asset’ for Capital Gains Tax (CGT) purposes which means that HMRC says it has a life of fewer than 50 years and so is exempt. Note that the exemption applies even if the wine is more than 50 years old.
Start a small side business
Setting up a small part-time business can result in a tax saving. Whether selling on eBay or undertaking some limited freelance work, earnings outside normal work are subject to a £1,000 Income Tax relief.
Simply put, this trading allowance provides for a complete exemption from Income Tax if total trading and miscellaneous income in the year is less than £1,000.
Get married (1)
Under Inheritance Tax (IHT) gifting rules, parents can gift up to £5,000 to a child on the occasion of their wedding and this gift will fall outside of their estate for IHT purposes.
As each parent can offer up a £5,000 gift, the happy couple can benefit from £20,000 in tax-free cash. The parents also reduce the value of their estate for IHT purposes.
Get married (2)
The Marriage Allowance lets an individual transfer £1,250 of their Personal Allowance to their husband, wife, or civil partner. This reduces their tax by up to £250 in the tax year.
To benefit as a couple, the lower earner must normally have an income below their Personal Allowance (£12,500 in the 2020/21 tax year) and the higher earner should be a basic-rate taxpayer.
Pay into a child’s pension
Tax relief is available on payments of up to £2,880 a year into a child’s pension. The child will benefit from the 20% tax relief meaning theirs contributions are boosted to £3,600.
Bear in mind that, under current rules, the child would not be able to access the money until they retire.
Claim self-employed expenses
People who run their own business can claim expenses they have incurred as part of operating their company.
This might include things such as ‘using the home as an office’, fuel, stock, phone bills or other expenses that can be deducted from profits, reducing the tax liability.
Offset losses against capital gains
Capital losses incurred in a tax year must be offset against any capital gains in the same tax year.
If the losses are more than the gains, you can carry this loss forward indefinitely and set it off against gains you make in future years. And, if you carry forward losses, you benefit from deciding how much of this loss you want to use in subsequent years, taking into account your annual CGT exemption (£12,300 in the 2020/21 tax year).
Take £2,000 in dividends
Each year, an individual can receive a certain amount of income from dividends before paying tax.
In the 2020/21 tax year, this is £2,000, meaning an individual can earn up to £2,000 in dividend income without paying tax.
This dividend may come as a payment from the individual’s own business, or as dividends from shares or other investments.
Save for your children or grandchildren
If a parent or grandparent wants to put money aside for their child or grandchild, they can avoid paying tax on the interest/gains by using a Junior ISA. Usually if a parent saves money for their child, any interest earned above £100 would be taxed under the parents’ allowances; this isn’t the case with a JISA as interest is tax-fee.
The Junior ISA limit is £9,000 in 2020/21. Interest made on cash is free from tax, and any gains made on a Stocks and Shares ISA are also free from Income and Capital Gains Tax.
Invest with an Enterprise Investment Scheme
The government offers tax relief to encourage individuals to invest in start-up and young businesses.
This is a very high risk investment and not suitable for most, however, any individual who buys shares in a qualifying company can deduct 30% of their investment from their Income Tax bill for the year. The amount that can be invested in any given year is £1 million - potentially saving up to £300,000 in Income Tax.
Give away £250
While any gift won’t be counted towards an Inheritance Tax bill if an individual lives for seven years, any gifts of up to £250 also fall outside of an estate for IHT purposes.
This is in addition to the annual gift allowance (£3,000 in the 2020/21 tax year) as long as the smaller £250 gifts don't go to the same person.
Carry on working past State Pension age
If an individual continues to work beyond the State Pension age, they do not need to keep making National Insurance contributions.
Anyone working into their late 60s or beyond should, therefore, let their employer know, to make sure their salary is adjusted accordingly.
Donate to charity
Making donations to charity using Gift Aid is tax-free. For a basic-rate taxpayer, a £12.50 donation to charity will cost just £10.
Higher and additional rate taxpayers can claim the difference between the rate they pay and basic rate on their self-assessment tax return. A £12.50 donation from a higher-rate taxpayer will cost just £7.50.
Also, if 10% of an individual’s net estate is left to charity, the IHT rate payable on the remaining estate reduces from 40% to 36%.
And lastly….Eat Jaffa cakes
Cakes are zero-rated for VAT even if they are covered in chocolate. However, chocolate biscuits attract VAT at the standard rate of 20%.
In a famous case, a tribunal decided that, while Jaffa cakes had characteristics of both cakes and biscuits, they had enough characteristics of cakes to be accepted as such. Jaffa cakes can, therefore, save you tax, as they are zero-rated for VAT.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.
If you would benefit from advice on maximising the many tax allowances, reliefs and exemptions available, we can help. To find out more, contact us.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
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