Do you want to lower your tax bill? Of course, you do. Here are some great ways to do so.
- Rent Out a Room
You can easily earn £7,500 tax free if you rent a room in your home. April 2016 was when the generosity of the “rent a room scheme” grew significantly. The threshold was £4,250 prior to this. However, there are some constraints: you can only let out the rooms in your home. You cannot use it for homes that have been turned into separate flats.
- Allowances That Are Tax-Free
It is always a good idea to try to make the most of the basic allowances and reliefs since they have increased significantly in the recent years. If you make use of the basic income tax allowance along with tax-free allowances for capital gains, dividend income, and savings income, you can get more than £28,000 free of tax annually.
The potential for tax-free saving has also increased with the rise in the Individual Savings Account (ISA) allowance to £20,000. The launch of the Lifetime ISA (LISA) is helping the younger segment of the population save for retirement or for the purpose of buying a home. LISA is targeted at the people under 40 years who will save up to £4,000 annually while receiving a 25-percent government bonus. The options for tax friendly savings were also recently expanded while the ability to hold peer-to-peer loans in the new Innovative Finance ISA is helping shield the interest that borrowers repay from tax.
Pension tax breaks are still quite generous, even though the amount you can save this way has reduced considerably. Pensions are the most efficient significant form of savings, according to a think-tank known as the Institute of Fiscal Studies. As is the case with ISAs, there’s potential to save in pensions on behalf of children. A maximum annual contribution of £2,880 is topped up to £3,600 because of tax relief.
- Digital Tax
Starting April, an additional £2,000 of earnings from trading income or property can also be protected. The 2 new £1,000 allowances are targeted towards people using websites such as Airbnb for renting out rooms in their homes and using platforms such as eBay to sell items according to Vatglobal. The tax breaks were designed to benefit the micro-entrepreneurs that either rent out their homes via the Internet or sell services online.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) that invest in small, but higher risks firms can be an excellent source of tax relief especially for the high earners.
EIS investments that aree held for at least 2 years generally also qualify for inheritance tax relief as do unquoted shares and other business assets. It is referred to as “business property relief” and it costs the government £585 million annually while the agricultural land inheritance tax relief costs the government an additional £450 million annually.
- Charitable Giving
If you earn over the £43,000 higher-rate threshold, you may be able to reduce your tax bill using tax relief on charitable giving, with the benefit being split between the taxpayer and the charity. Community amateur sports clubs and charities can claim an additional 25 pence for every £1 given by taxpayers using “gift aid”. A higher-rate taxpayer can then use the tax return to claim back an additional 25 pence.
- Inheritance Tax
The introduction of rules in April scrapping the inheritance tax on family homes worth up to £1 million is quite generous and will cost £940 million annually by 2021.
The people that can afford to give away their assets use the “7-year rule” as the mainstay of inheritance planning. While it is commonly known that gifts made are exempted from inheritance tax if you live for an additional 7 years, tax advisers say than an often forgotten exemption is that of regular giving. If you establish a pattern of gifts, they are likely to be exempted from tax from the very start if you prove that your standard of living was not affected by giving away the money.
- Family Limited Partnerships
Family limited partnerships have become a great alternative to trusts since they are tax-efficient. Trusts are now taxed heavily. The family limited partnerships give an element of control to families that wish to hand down assets to the younger generation by allowing parents to dictate when to hand money down to youngsters. The money transferred into such partnerships does not attract inheritance tax as long as the donor lives for a further 7 years. However, it is important to be wary of traps when using this type of vehicle and it is a great option for the well-advised and the wealthy.
- Salary Sacrifice
The opportunities for tax avoidance on employment years have shrunk drastically in recent years, but it’s still possible for employees to save tax by exchanging pay for perks. In spite of planned cuts to “salary sacrifice” schemes, there are still opportunities for making savings on childcare, pensions, ultra-low emission vehicles, and cycle-to-work schemes.