Are You Paying Too Much Tax?
Most people pay too much tax. The tax rules are extremely complex and it’s easy to end up paying too much without even knowing it. These are some of the most common reasons and a few ideas to reduce your bill.
Check your tax code
Probably the most common reason for paying too much tax is that you have been assigned the wrong tax code. Changing jobs, returning to the UK from overseas or previously receiving employee benefits can all lead to an incorrect tax code.
You can find your tax code on your annual P60 and correspondence with the HMRC. Most tax codes start with the letters L, which means you are paying basic tax and have a normal personal allowance, or P, which is for people aged 64-74 entitled to the full personal allowance. If your tax code starts with T, this is a temporary tax code which means you are paying much higher than the basic rate.
If you think you may be paying too much tax, check you have the right code on the HMRC website. If it’s incorrect you can then contact the HMRC and request a tax assessment and potentially receive a rebate.
Entitlements for the self employed
More and more of us are working as contractors or on a freelance basis, which involves moving from PAYE to handling your own tax. If you are self-employed, you may be paying more to the HMRC than you should by not claiming all your allowable expenses. For instance, if you work from home you may be able to claim some of your utilities, broadband and phone and mortgage payments against tax. You can also claim for equipment like computers or printers – either the whole or part of the cost depending on whether they are used solely for work.
Working closely with a wealth management firm like John Lamb, as well as your accountant, can help to reduce this tax liability and make sure you are making use of all of your available allowances.
Spread your income
One of the most effective ways of minimising tax is to pay more money into a pension, spreading your income beyond retirement and benefiting from lower tax rates.
You can put as much as you want into a pension, but there are annual and lifetime limits on how much tax relief you’ll get on your contributions. In the tax year 2017-18, UK taxpayers will get tax relief on pension contributions up to £40,000 annually, depending on their income. You can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years. The lifetime allowance for this tax year is £1 million.
Once you have retired, you can normally withdraw up to 25% of your pension pot tax free, either as a lump sum or as 25% of each individual withdrawal.
Use your full ISA allowance
ISAs are simply savings accounts that you don’t pay tax on, introduced by the government to help encourage saving. There is a limit on the amount you can invest in ISAs – a maximum of £20,000 in 2017/18, but you can now choose whether to invest it in cash ISA, a stocks & shares ISA, an innovative finance ISA, a Help to Buy ISA, a Lifetime ISA or a mixture of all of the above. Bear in mind that different allowances apply to different products, eg you can invest up to £3,400 in a Help to Buy ISA a year but £4,000 in a Lifetime ISA.
These are just a few ways in which you could be overpaying tax. The UK tax system is extremely complicated, particularly if you run a business or have several sources of income, and there are all sorts of ways to reduce the amount you pay. Getting expert advice can help you reduce your payments even more.
John Lamb Wealth Management believes it simply makes sense to take advantage of all the reliefs and allowances available to limit tax, so we consider the implications of tax across all our financial planning work. We find tax-efficient ways for you to save, invest, protect and pass on your wealth within your particular financial situation and objectives.
Our tax planning solutions range from the straightforward, such as using your annual ISA and capital gains tax limits, to the more complicated, such as handling estates and setting up trusts.
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