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52 Ways to Save Tax #28

Pay less taxMillions of people across the UK like to enjoy a pint at their local pub. But did you know that if you drink very strong beer then you are also paying more tax?

In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of tax that you pay simply by switching to a weaker beer.

52 Ways to Save Tax – Part 28: Drink weaker beer

Drinkers have paid tax on beer in the UK for over three hundred years. The first beer duty was introduced in 1690 and now beer drinkers in the UK pay some of the highest tax in the world.

In 2015, British drinkers paid around 52 pence per pint in beer duty (assuming an average pint of 5 per cent ABV beer). This is compared to just 4 pence in Spain and Germany, 9 pence in Belgium and 16 pence in the Netherlands. Britons pay almost 40 per cent of all EU beer duty but only consume 12 of the beer.

In 2011, the Chancellor announced changes to the way that beer duty was calculated. As well as introducing a reduced tax rate for lower strength beer, George Osborne also increased the duty on high strength beer. The additional duty on beer with an  alcohol by volume (ABV) of over 7.5 per cent added 25p to the price of a can of ‘super strength’ lager in 2011.

Currently, the amount of beer duty that you pay depends on the beer’s strength (or ABV).

  • Strength 1.2 per cent to 2.8 per cent – 8.1 pence per litre for each % of alcohol
  • Strength 2.8 per cent to 7.5 per cent – 18.37 pence per litre for each % of alcohol
  • Strength 7.5 per cent and above – 23.85 pence per litre for each % of alcohol

The tax changes mean that a lower strength beer can now be up to 50p a pint cheaper than a high-strength alternative.

Here’s an example. If you buy a pint of 5.0 per cent strength lager, the beer duty you pay is 18.37 pence x 5.0 = 91.85 pence per litre. This works out at just over 52 pence a pint (about 568ml or 0.568 litres).

If you buy a pint of 2.7 per cent strength lager, the beer duty you pay is 8.1 pence x 2.7 = 21.87 pence per litre. This works out at around 12.5 pence per pint.

By choosing the lower strength beer you pay around 40 pence less tax on every pint that you drink.

Research has also found that the prospect of drinking weaker beer appeals to many pub-goers. A survey by the Campaign for Real Ale (CAMRA) concluded that 52 per cent of drinkers would consume a lower-strength beer if it were available in their local pub.

Drinking beer means paying less tax than drinking spirits

Drinking beer is also much more tax-efficient than drinking spirits. Currently, you pay £27.66 of ‘spirit duty’ per litre of pure alcohol.

This means that the duty you pay on a pint of 40 per cent ABV vodka is around £6.28 (compared to just 12.5 pence a pint on low-strength beer).

 

52 Ways To Save Tax #12

SavingsOne of the major announcements in George Osborne’s 2015 Budget concerned the way in which savings interest would be taxed from April 2016. There are going to be significant changes to the tax regime on cash savings that will benefit the vast majority of taxpayers in the UK.

Keep reading to find out how putting you money in savings can reduce your tax bill and save you hundreds of pounds a year.

52 Ways to Save Tax – Part 12 : Put your money in a savings account

If you have some of your savings in a High Street savings account then you could be set to benefit from one of the new measures announced by the Chancellor in his 2015 Budget speech.

From April 2016, every basic rate taxpayer in the UK will be able to earn £1,000 in savings interest each year without having to pay any tax. Higher rate taxpayers will be able to earn up to £500 in savings interest.

The change is set to help around 28 million savers avoid tax on their money. It means that for around 95 per cent of savers, all the interest they receive on their savings will be paid without any tax being deducted – effectively giving a 20 per cent boost.

At present, banks and building societies deduct the basic tax rate of 20 per cent before paying your interest. If you don’t pay tax then you can register to receive your interest tax-free (using a R85 form) while if you’re a higher or additional rate taxpayer then you have to declare interest on your tax return and pay even more tax.

At present, if you are a basic rate taxpayer and you have £20,000 in a High Street savings account paying 2 per cent interest you would only earn £320 a year in interest. A higher-rate taxpayer would earn £240 and a top-rate taxpayer £220.

When the changes come into force in April 2016, you would earn £400 in interest.

The changes from April 2016

From the start of the tax year – April 6, 2016 – banks and building societies will stop automatically deducting interest from your savings. All the interest you receive will be paid tax-free.

If you earn below £16,800 a year you won’t have to pay any tax on savings interest. If you earn between £16,801 and £42,700 you will be allowed to earn £1,000 in interest without any tax being deducted.

If you earn between £42,701 to £150,000 you will have a £500 allowance  and if you earn more than this you will have to pay tax on your savings interest.

If you are a basic taxpayer it effectively means that you can have up to around £70,000 in an easy-access savings account (assuming a current interest rate of around 1.35 per cent) and earn itnerest without paying any tax.

By investing more of your cash in savings accounts from April it means that you will avoid the 20 per cent deduction and help you to reduce your tax bill.

52 Ways to Save Tax #11

Inheritance Tax is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. Currently charged at a rate of 40 per cent, an inheritance tax bill on a large estate can run into tens or even hundreds of thousands of pounds.

However, there are ways of reducing your inheritance tax liability by making gifts while you are alive. In the next part of our series ‘52 Ways to Save Tax’ we look how you can pay less tax by giving money away. Keep reading to find out more.

52 Ways to Save Tax – Part 11: Give money away

There are several ways of making gifts and reducing your potential tax bill. These include:

Giving small gifts

In each tax year, you can gift up to £250 to as many people as you like, completely free of Inheritance Tax. Wedding gifts and individual gifts up to this amount can be given to as many different people as you wish.

Remember that you can’t give a larger sum of money and claim exemption for the first £250.

Give up to £3,000 every year

As well as the individual £250 gift limit you can also give away £3,000 in total each tax year – although you can’t combine these two allowances with gifts to the same person.

The estate won’t pay any Inheritance Tax on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called your ‘annual exemption’.

If you don’t use your annual exemption you can carry it over into the next tax year, but the maximum exemption is £6,000.

Give a wedding gift

Wedding or civil partnership ceremony gifts are also exempt from inheritance tax – although there are limits to this:

  • Parents can each give cash or gifts worth up to £5,000
  • Grandparents and great grandparents can each give cash or gifts worth up to £2,500
  • Anyone else can give cash or gifts worth £1,000

In order to qualify for this exemption you will need to give this gift (or promise to give it) on or shortly before the date of the wedding or civil partnership ceremony.

Give regular gifts from your income

There is no Inheritance Tax to pay on gifts from the deceased’s income (after they paid tax) as long as they had enough money to maintain their normal lifestyle. Such gifts may include:

  • Christmas, birthday and wedding/civil partnership anniversary presents
  • Life insurance policy premiums
  • Regular payments into a savings account

Give a gift to charity or a political party

Gifts to UK charities are also tax-free. The deceased person’s estate will pay Inheritance Tax on gifts to charities, museums, universities or community amateur sports clubs.

In addition, there is no Inheritance Tax to pay on a gift to a political party as long as they have either:

  • 2 members elected to the House of Commons
  • 1 member elected to the House of Commons and received at least 150,000 votes in a general election

52 Ways to Save Tax #10

If you sell an asset for a profit then you may have to pay tax on the money that you make. This is called ‘Capital Gains Tax’ and could leave you with a sizeable tax bill if you sell shares, antiques or investment property for a profit.

In the next part of our series ‘52 Ways to Save Tax’ we look how you can pay less tax by using your annual Capital Gains Tax allowances. Keep reading to find out more.

52 Ways to Save Tax – Part 10: Use your Capital Gains Tax allowance

Capital Gains Tax (CGT) is the tax that you pay on the profit that you make when you dispose of an asset. Remember that any tax that is due is paid on the ‘gain’, not the whole amount you sell the asset for.

For example, you buy a painting for £10,000 and sell it for £50,000. The ‘gain’ you make is £40,000 and any CGT that is due would be paid on this amount.

It is not just selling an asset that creates a potential Capital Gains Tax liability. You may also have to pay tax if you gift an item to someone else, swap it for another asset or if you got compensated for it (for example if you received an insurance payout because an asset was destroyed).

When you may have to pay Capital Gains Tax

You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell/dispose of a personal possession for £6,000 or more. Assets on which CGT may be payable include:

  • Jewellery
  • Paintings
  • Shares not held in an ISA or PEP
  • Antiques
  • Stamps and coins
  • Property that is not your main residence

When you don’t pay Capital Gains Tax

There are certain items that are exempt from Capital Gains Tax and certain annual exemptions that you can use. These will help you to dispose of an asset on which you have made a gain without having to pay any tax.

You don’t pay CGT on:

  • NISAs, ISAs or PEPs
  • Betting, lottery or pools winnings
  • UK Government gilts
  • Premium bonds
  • Personal possessions with a lifespan of less than 50 years
  • Most gifts to your husband, wife, civil partner or a charity
  • Your car – unless you’ve used it for business

You also have an annual Capital Gains Tax allowance, called the Annual Exempt Amount. This means that you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance which, in the tax year 2014/15, was £11,000.

Working out your gains

You won’t pay any Capital Gains Tax if your total taxable gains are below your annual Capital Gains Tax allowance (£11,000 in the 2014/15 tax year). To work out what your gains are you should:

  • Work out the gain you have made on each asset that you have disposed of in the last tax year (shares, personal possessions etc)
  • Add together the gains to make a total
  • Deduct any allowable losses

If your total gains are below your allowance you won’t have any Capital Gains Tax to pay.

If your gain is above the CGT allowance then you will have some tax to pay. The basic rate of CGT is 18 per cent although higher rate taxpayers – which may include you if your gains added to your other income carry you into the higher band – pay 28 per cent.

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 mysupermarket.co.uk 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.

 

52 Ways To Save Tax #2

In the second part of our brand new series ’52 Ways to Save Tax’ we look at a way that you can cut your tax bill and do something positive in the process. Keep reading to find out how making a gift to charity can reduce your tax bill – particularly if you are a higher or additional rate taxpayer.

52 Ways To Save Tax – Part 2: Giving to charity

If you are a UK taxpayer and you make a donation to a charity then there are tax advantages.

The Gift Aid scheme is for gifts of money by individuals who pay UK tax. When you make a donation through Gift Aid, the charity takes your donation – which is money you’ve already paid tax on – and reclaims the basic rate tax from HM Revenue & Customs (HMRC) on its ‘gross’ equivalent – the amount before basic rate tax was deducted.

The basic rate tax is 20 per cent.  This means that if you give £100 using Gift Aid, it’s worth £125 to the charity.

Tax advantages to higher rate taxpayers

If you pay higher rate tax, you can claim the difference between the highest rate of tax that you pay and the basic rate of tax on the total ‘gross’ donation you make to a charity.

For example, if you donate £100 to a charity, under Gift Aid the total value of your donation to the charity is £125. This means that you can claim back:

£25 – if you pay tax at 40 per cent (£125 × 20%)

£31.25 – if you pay tax at 45 per cent (£125 × 20%) plus (£125 × 5%)

You make this claim on your Self Assessment tax return.

It is also possible for you to elect for a donation to be treated as if it had been made in the previous tax year. For example, if you were a higher-rate taxpayer last year but not this year, it would be advantageous to have a donation treated as if it had been paid in the previous year.

Leaving gift to a charity in your will

If you leave a gift to a charity in your will, its value will not be included when valuing your estate (your money, possessions and property) for Inheritance Tax purposes.

This means that you can reduce the value of your estate – and therefore the amount of Inheritance Tax that may be due – by leaving a gift to a charity in your will.

For example, if the value of an estate on death was £425,000 the amount of Inheritance Tax that would normally be due (tax year 2014/15) would be £40,000 (40 per cent of the sum over the threshold of £325,000).

If you had chosen to leave £10,000 to a charity in your will, the value of the estate would reduce to £415,000, reducing the Inheritance Tax bill to £36,000. You would save £4,000 in tax.

1000L – Everything You Need To Know About Your Tax Code 2014/2015

Are you one of the millions of people whose tax code for 2014/2015 is 1000L? If you pay your tax through PAYE and you receive the full tax free Personal Allowance, this may well be your tax code for the 2014/2015 tax year. 1000L is also the ‘emergency tax code’ for the 2014/2015 tax year. Watch the following 2 minute video and read this article to find out everything you need to know about the 1000L tax code

The 1000 in your tax code

Your Personal Allowance is the amount of money you’re allowed to earn each year before you pay tax.  On April 6, 2014 the Personal Allowance increased from £9,440 to £10,000. This means that most people can earn £10,000 before they start to pay any income tax.

The number in your tax code helps you to work out what your Personal Allowance is. You simply multiply the number on your tax code by 10.

In the 2014/2015 tax year, many people will have the tax code 1000L. This means you can earn £10,000 – the basic Personal Allowance – before you have to pay any income tax.

‘L’ tax codes

If your tax code features numbers and then the letter ‘L’ it means that you are eligible for the basic Personal Allowance (£10,000) in the 2014/2015 tax year. Your tax code may be 1000L.

If your tax code ends in the letter ‘P’ it means that you are between the age of 65 and 74 and you are eligible for the full Personal Allowance (tax code 1000P). If your tax code ends in ‘Y’ it means that you are over the age of 75 and you are eligible for the full Personal Allowance (tax code 1000Y).

Why 1000L may be your ‘emergency’ tax code

If HMRC doesn’t have sufficient information about your income, they may issue your employer or pension provider with an ‘emergency tax code’.  An emergency tax code is used on a temporary basis while HMRC establish what your correct tax code should be.

If you have an emergency tax code it will ensure that you receive the basic tax free Personal Allowance (£10,000 in tax year 2014/2015).  However, it doesn’t take any other allowances into account.

The emergency tax code is set each year by HMRC and is a number followed by the letter ‘L’.  In the 2014/2015 tax year, the emergency tax code is 1000L.

However, if you have the 1000L tax code it doesn’t mean you are on an emergency tax code. For example, if you are eligible for the basic Personal Allowance and have no deductions you may have the same tax code.

Tax Code 1000L