The following is a guest post…
In the UK, there is a difference between evading tax and avoiding it. The latter refers to variousschemes, initiatives and tactics that are designed to reduce an individual’s tax bill, whereas theformer describes the many illegal attempts to not pay tax.
The key point to note is that tax avoidance can be perfectly legal. Avoiding tax is also a relativelystraightforward task; for instance, beating the tax man is possible by simply switching savings from apersonal account into a government-backed ISA which is exempt from interest tax.
An Individual Savings Account or ISA allows people in the UK to save several thousand British poundstax-free every year. The current annual investment limit for a cash ISA is £5,640, so savers candeposit that much money and not a penny more into their ISA within the qualifying period of time.When the next tax year starts, savers receive a new allowance for their ISA and can top it up at onceor during the year.
The ISA is just one example of how Brits can honestly avoid tax by juggling their savings. Another ismore indirect. In the UK, inheritance tax is charged on assets passed from the estate of a deceasedperson to their next of kin or the beneficiaries of their will. Taxation can be circumvented to anextent by setting up a legal trust, but people in Britain should also be aware that gifts made prior todeath could be subject to tax.
Every person in the UK has a £3,000 annual gift exemption, meaning that a sum of cash up to thisamount can be transferred from a person’s excess income to a relative’s account in every twelve-month period without penalty. An additional £5,000 can be gifted by parents to their childrenwho marry, while grandparents are able to gift £2,500 tax-free. Other types of gift are subject toinheritance tax if the person who provides the gift happens to die within seven years, so somethought should be given to this.
As with other types of savings, a cash ISA is only guaranteed up to £85,000 (per person) by theFinancial Services Compensation Scheme. This can make it a risky business for any attempt bywealthier savers to avail of traditional savings options.
Even in today’s uncertain economic climate, investment can be a viable alternative. The enterpriseinvestment scheme (EIS) is favored by many Brits who want to cut their tax bill because it canbe used to plough as much as £500,000 into certain types of small firm to qualify for tax relief.Exempt from inheritance tax and even capital gains tax, shares in small firms purchased under theEIS can reduce an individual’s tax bill by 20 percent, the equivalent of £100,000 off the maximuminvestment.
If the investment is relatively safe, it is easy to see how money can be saved by availing of the EIS.Even more tax can be saved by investing in a venture capital trust (VCT), which reduces tax by 30percent and features a maximum investment of £200,000.
Tax can also be clawed back by the self-employed, who can offset business expenses (lighting, fuel,call charges etc.) against their profits, thereby reducing their overall tax burden. Every taxpayer should also double check their tax code to ensure no mistakes have been made by the HMRC.