Vintage quirks to avoid paying certain taxes . . .
AS the end of the tax year looms, it’s worth thinking about those great holes in your buckets called tax. While we can focus on working harder to earn more, the holes in the bucket often put quite a strain on the family household.
Calculating the average tax rate is quite tricky, so best endeavour is all we have. A £25,000 earner in the UK has an effective rate of tax at 18.9 per cent, a £40,000 earner 24.8 per cent, and a £100,000 earner 34.3 per cent.
This is the equivalent of a £25,000 earner, working nearly all day Monday to pay the taxman before they start benefitting themselves, and the higher band earner not benefitting until late on Tuesday afternoon.
We can talk about tax for a long time, but it’s worth noting that the UK’s tax system isn’t as penal as many think. For example, did you know in Germany, individuals are expected to contribute 8 per cent or 9 per cent of earnings to the Church, depending on where you live. Generally, in comparison to the UK’s neighbours, our tax is pretty competitive.
After paying tax on your income it therefore makes sense not to pay it again and again on future spending or savings, prolonging the length of time in the week you are working for the taxman.
Unlike the well-documented tax schemes that have failed Ronaldo, Messi and Mourinho, proper tax planning uses the laws that are applicable to you rather than seeking to exploit them.
There are some really surprising quirks: did you know you can pay a bonus to an employee in the form of a vintage car to avoid national insurance contributions and it is not targeted by the general anti abuse rules. Similarly gains on vintage cars are not liable for capital gains tax.
Grandparents can transfer money out of their estates and into trusts for grandchildren where the income taken from the trust for the children is kept less than the personal allowance of £11,500.
Other options are to use a family limited partnership which allow a gift into that partnership which is then outside of inheritance tax after seven years and allows the parents the ability to dictate when their younger children should receive the money. Similarly, you can use a discounted gift trust, which allows you to put a lump sum into a trust for beneficiaries whilst still retaining the right to payments back to you.
Remember, if you give money away regularly to children or grandchildren, show you can afford it, and create a pattern, this will ensure the gifts are out of the estate from the beginning without having to have survived the full seven years.
Each year, be sure to use your full capital gains allowance of £11,300 to realise any gains so they don’t mount up. Capital gains on assets are wiped out on death and so a person with a terminally ill spouse might make a tax free gift of shares they own to them and the spouse would have them transferred under the terms of the will. On death, the gain is wiped out and the surviving spouse has a new starting point with their investments.
You cannot underestimate the benefit of a pension scheme for tax. As a basic rate taxpayer if you make a contribution of £80, it is automatically topped up by the taxman to £100, which is an immediate guaranteed return of 25 per cent. For a higher rate taxpayer, this has a 66 per cent uplift immediately from £60 to £100.
Contributions your employer makes to your scheme will also mean you miss out on paying national insurance as does your employer, which is a triple tax gain.
If you are a higher rate taxpayer and gift to charity, after ticking the gift aid box the charity claims an extra 25p for every pound. The higher rate taxpayer can then claim another 25p via their tax return. Remember you can also give money into a pension up to £3,600 gross for a non- working spouse.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For advice on tax within your pensions and investments please call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.