Y o u r M o n e y Your I Money


t is amazing how many people find it difficult to put their financial house in order, and often leave important


decisions to the last minute. Many of us avoid sorting out our tax affairs because we believe it is too complicated. So let’s make a New Tax Year resolution to get a grip of our tax matters. It is easier than you think, and in the increasingly difficult economic climate, it could even put extra money in your pocket.


THE TAX MAN TAKETH AWAY Most of us believe we are paying too much Income Tax. The reality is that many of us actually do – so this article will attempt to make tax clearer and make sure we are tax efficient.


Most employees do not receive a tax return to fill in, and instead have their income tax deducted at source by their employers or pension providers. Only those who have complex tax affairs automatically receive a return from HM Revenue and Customs. For these people a process of self assessment is followed, and returns can now be completed online. However everyone who pays tax should receive a record of the tax they have paid from their employers – P45, P60 and P11D forms for example – and the law requires you to keep these records so that you can complete a tax return fully and accurately if you are ever asked to do so.


We all have a standard personal tax allowance from the Revenue, denoted as our own personal tax code, which indicates the amount we can earn before we have to start paying tax. This tax year (2008/09) this allowance is £5,435. Therefore if you earn £10,000 during the year, from what ever source (pay, interest, savings and pension), you will only pay tax on:


£10,000 (your income) – £5,435 (your personal tax allowance)= £4,565 taxable amount (on which tax is deducted)


Following changes to the tax system this year there are now only two tax bands; the basic rate of tax is 20% for the first £36,000


28 Summer 2008


The Tax Man Taketh Away and The Tax Man Giveth


Al Voice, Managing Director of Forces Financial explains a few key tax issues, those that we ignore at our peril and those that with a little bit of time invested can make us better off.


earned, and a higher rate of tax, 40%, is applied to all earnings over £36,000. As I write this article there is much controversy about the loss of the 10% income tax band and demonstrates the danger all government’s face when changing taxes.


For savers, there is a new 10% starting rate for savings income only, with a limit of £2320. But, if an individual’s taxable non-savings income is above this limit then the 10% savings rate will not be applicable.


So looking at our example of £10,000 income, as a basic rate taxpayer the amount due would be:


£4,565 (taxable amount) x 20% (lower tax band) = £913 tax liability


However if the income is £100,000 then the calculation for tax payable would be:


£100,000 – £5,435 (personal allowance) = £94,565 taxable income


First £36,000 taxed at lower 20% rate = £7,200 Remaining £58,565 taxed at the higher rate of 40% = £11,713


Resulting in a total tax liability of £18,913


Apart from the personal allowance, individuals and families can qualify for further allowances like Working Tax Credits and Child Tax Credits, as well as tax free monthly payments such as Child Benefits and the Guardian’s Allowance. Therefore time will be well spent checking whether you are eligible by going to www.hmrc.gov.uk and if you are posted overseas you may still qualify, so don’t let that put you off.


We can all minimise our tax liabilities on savings by using tax efficient saving vehicles like ISA’s, Child Trust Funds, Saving Bonds and Personal Pensions. Another simple move, if your partner is not a taxpayer, is to ensure all savings income is paid to them so no tax is paid until they have used all their £5,435 personal tax allowance. Use form R85 at www.hmrc. gov.uk to register your bank or building society account to receive your interest on UK savings


without tax taken off by your bank or building society. But remember, whilst the savings habit is an important one to develop, you must prioritise repayments on debts and the mortgage first.


INHERITANCE TAX. This tax may be payable on the value of a person's estate on death, and on certain gifts made by an individual during their lifetime. For many years this was a rich man's tax, but increasingly it is catching more of us. The annual inheritance tax threshold, currently standing at £312,000 for individuals or £624,000 for married couples and civil partners, above which inheritance tax becomes due. You can avoid some death duties by advanced tax planning and the use of trusts and gifts. However in my view we should all SKI (Spend the Kids Inheritance), but more balanced information on avoiding inheritance tax can be found at www. business.timesonline. co.uk/tol/business/money/tax !


CAPITAL GAINS TAX (CGT) You may be liable to CGT on things you own that you sell, give away or transfer wherever in the world these are located. CGT is a tax on profits or gains you make on the disposal of your assets. Like income tax, individual’s have a yearly allowance, which is set at £9,200 for 2008/09.


It is possible to take offset gains against any losses, as in this example:


Alison bought some shares in August 2001 for £22,000. In August 2007 she sold them for £5,000. Alison has made a loss of £17,000, which she could use against any gains she makes in the same tax year 2007/08, or she can carry the loss forward against any gains she makes in future years.


In conclusion, if you think you are paying too much tax (or indeed too little) contact the Inland HM Revenue & Customs, I have always found them very helpful. Remember to keep all your documents safely filed, just in case. The time limit for making a claim is five years. So it is worth investing some time and effort, and yes, it is easier than you think.


www.forcesfinancial.com


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