September, 2014

How To Avoid Your New Employer Seeing Your Earnings

If you’ve applied for a new job or you’re about to start with a new employer then you will have to provide some information about your tax status. This will help your new employer to ensure that you’re on the right tax code and that you’re paying the right amount of tax.

But, what if you don’t want your new employer to know what your previous salary was? Perhaps you want to keep that information confidential? Or, maybe you entered into long and protracted negotiations about your new salary and you don’t want your employers to know that you’re on a much higher wage?

If you want to avoid your new employer seeing your earnings, one possible way is to not give the employer your P45 and to use a ‘Starter Checklist’ instead. Keep reading to find out more.

What your P45 says

When you stop working for an employer you will receive a P45 tax form. Whether you leave voluntarily, you are made redundant or you are fired you will receive a P45 and this form contains various pieces of information including your PAYE reference code.

Crucially, your P45 also shows how much you earned and paid in tax during the tax year.

Your P45 will be in 3 parts. When you join a new employer you should ordinarily give parts 2 and 3 to the new company. This allows them to see how much tax you have paid and to put you on the correct tax code.

If you do not want show your employer your P45 because you want to keep your previous wage confidential then you can get around giving them your P45. Instead, you should send parts 2 and 3 to your tax office along with details of your new employer. If you do this straight away it will help you to ensure that you are put on the correct tax code.

If you don’t provide your new employer with a P45 then they will have to put you on an emergency tax code until they obtain the correct details from HMRC. If you have told the tax office your details then this should be sorted out quickly. If not, you could overpay tax until the end of the tax year and then you may have to claim a tax refund.

Use a ‘Starter Checklist’ instead

In the past, if you did not provide a P45 form to your new employer then you would have had to complete a P46 form.

Now, the P46 form has been replaced by the ‘Starter Checklist’. If you don’t provide your P45 to your employer as you don’t want them to know your previous salary your new employer may give you a ‘Starter Checklist’ to complete. This contains important information that affects the amount of tax you’ll pay, including:

• Whether this is your first job
• If you’ve been claiming Jobseeker’s Allowance or Employment and Support Allowance
• If you have another job
• If you are paying off a student loan

The Starter Checklist will help your employer to allocate a tax code and work out the tax due on your first pay day. It is therefore beneficial if you can complete the Starter Checklist or provide the relevant information your employer has asked you for as soon as possible before your first pay day. If you do, your employer will know what tax code to use and it is more likely that you’ll pay the right amount of tax from day one.

52 Ways To Save Tax #5

In the fifth part of our series ‘52 Ways to Save Tax’ we look at a way that you can both save tax and help prepare yourself financially for the future. Keep reading to find out how topping up your pension can help you pay less tax.

52 Ways to Save Tax – Part 5 : Top Up Your Pension

When you pay into your pension you receive tax relief from HM Revenue & Customs (HMRC). And, over time, the effect of this tax relief on your pension can be significant. There are three main ways that paying into your pension can be tax efficient:

1. Tax relief

When you pay into a pension you get tax relief on your premiums. The way this works depends on whether it is a company or a personal pension and we look at this further below.

2. Tax-efficient growth

Your pension fund grows largely tax-free, which can help to boost the amount you have saved in your fund.

3. Tax-free cash

When you take your pension benefits you can usually take up to 25 per cent of the fund as a tax-free lump sum (depending on your pension scheme rules). The remainder of your benefits will be paid as a taxable income.

Company pensions

If you pay more into your company pension you will pay less tax. If you have an occupational/company pension, your employer deducts your pension payments from your pay before working out your tax.

So if you earn £40,000 a year and pay an extra £1,000 a year into your pension, then only £39,000 will be regarded as ‘taxable pay’. The effect is that you pay £200 a year less tax.

If you are a higher rate taxpayer the tax savings can be even greater. For example, if you earn £45,000 a year and pay £1,000 a year into your pension you would pay £400 a year less tax. This effectively means that a £1,000 pension contribution has only cost you £600.

Personal pensions

If you are self-employed or you are not a member of an occupational scheme, then you get tax relief in a different way when you pay into a personal pension. Any contribution to your pension gets a top-up to take account of basic rate of tax.

For example, if you pay £80 to your pension your pension provider claims back £20 tax on your behalf and adds it to your pension. Your total contribution is £100 but you only pay £80 of it yourself.

If you are a higher-rate taxpayer then you can claim the extra relief through your tax self-assessment form at the end of the tax year.

Limits on your tax relief

You can get tax relief on every penny you contribute to your pension, up to 100 per cent of your annual earnings, with an upper limit of £40,000 in 2014/15.

If you exceed this ‘annual allowance’ you may be liable to a tax charge and must tell HMRC through your tax return. However you may be able to ‘carry forward’ unused allowance from up to three years earlier.

52 Ways To Save Tax #4

In the fourth part of our series ‘52 Ways to Save Tax’ we look at one of the simplest ways that you can reduce the tax you pay on your savings and investments. Keep reading to find out how opening an ISA can reduce your tax bill and save you hundreds of pounds a year.

52 Ways to Save Tax – Part 4 : Open an ISA

The Individual Savings Account – better known as the ISA – is the UK’s most popular tax shelter, used by around 20 million savers and investors.

In the 2013/14 tax year, any British saver aged 16 and over was able to deposit up to £5,760 into a cash ISA and earn tax-free interest on those savings. Any interest that you make on your ISA savings is cash free, unlike traditional bank and building society accounts.

Investors are also able to use a separate ISA allowance for stocks and shares investments. The limit for investing in an ISA in 2013/14 was £11,520, although this was reduced by the amount you had already invested into a cash ISA.

For example, if you had maximised your cash ISA deposit in 2013/14 then you would only be able to invest £5,760 (£11,520 minus £5,760) into your stocks and shares ISA.

Changes to ISA limits in 2014/15

Since July 1st 2014 the annual limit for an ISA has risen significantly. Whereas previously there were limits on the maximum amount you could pay into your separate cash and stocks and shares ISAs there is now one general ISA limit.

From 1 July 2014 you can now pay up to £15,000 into an ISA. And, you are now allowed to invest the full amount as cash or stocks and shares, or a mix of both. In addition, you are now able to switch stocks and shares ISAs to cash ISAs.

Why ISAs are tax efficient

Interest on savings you hold in a cash ISA is not taxed, whether it is an instant access or term deposit. And, dividends are not subject to additional tax, interest on bonds is not taxed, and capital gains are not taxed.

An additional benefit of saving in an ISA is that there is no need to report interest or other income, capital gains or trades to HMRC. This is because this is not taxable income.

Here’s an example of how much you can save by holding your savings in an ISA. You hold £5,000 in an ISA with an interest rate of 3%. Over the course of a year your interest would be £150 with no tax to pay.

If you are a basic rate taxpayer and you had held this money in a traditional building society account for the same period you would have paid tax of 20% on your interest – equivalent to £30. Your interest payment would have been £120.

52 Ways To Save Tax #3

In the third part of our series ’52 Ways to Save Tax’ we look at a way that you can cut your tax bill by taking more care when you’re buying goods and services. Keep reading to find out how going VAT free can reduce your tax bill and save you hundreds of pounds a year.

52 Ways to Save Tax – Part 3 : Go VAT free

If you buy goods and services then the chances are that you will pay Value Added Tax (VAT). VAT is charged on a wide range of items from the groceries you buy at the supermarket to services such as plumbing and car repairs.

In 2013, the tax raised a staggering £100 billion for the Treasury. Charged at 20 per cent, if you pay VAT on items it increases the cost of your goods and services by a fifth. So, buying items that don’t charge VAT can help you save a significant amount in tax.

Keep reading for our tips on how to save tax by paying less VAT.

Use small businesses

Businesses have to register for VAT if their annual turnover is above the registration threshold of £81,000. This means that any small or medium sized business that has a turnover of over £81,000 has to add the 20 per cent VAT charge to the cost of their goods and services.

Smaller businesses with a lower turnover aren’t liable for VAT and so do not have to charge the 20 per cent tax. So, if you have a choice between a larger or a smaller business it can pay to choose a small, independent business so you don’t pay the VAT.

Here’s an example. If you need a plumber to come and fix your washing machine, a local sole trader who is exempt from VAT may charge you £200.

If a larger, national business charged you £200 for the same service you may well have to pay VAT on top of this. In this case that would be 20 per cent, or £40, making the total cost of the work £240.

By using a smaller business you can avoid paying VAT and, in this example, save yourself £40.

Change the shopping in your trolley

The rules for VAT on food and drink are complicated. A spokesman for the website says: “There are some strange discrepancies between the types of foods that qualify for VAT. By making some smart decisions, consumers can avoid paying VAT on a lot of convenience foods.

“For instance, a gingerbread man decorated with two chocolate eyes is exempt from VAT, but if it contains any more chocolate, standard-rated VAT is charged. Likewise, unshelled salted nuts are exempt, but shelled salted nuts are not.”

Switching from products that attract VAT to those in the zero-rated bracket can save you money. Examples of switches you can make include:

  • Chocolate chip biscuits are VAT free while chocolate coated biscuits are not
  • Tortilla or corn chips are VAT free while potato crisps are not
  • Jaffa cakes are VAT free while arctic rolls are not
  • Mousse is VAT free while sorbet is not
  • Milk shake is VAT free while flavourings for milk shake are not

You could also make your own fruit smoothies (as there is no VAT on the ingredients) whereas VAT is payable on pre-made smoothie drinks.