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Income Tax

Income tax was introduced in 1798 by William Pitt the Younger to help pay for the Napoleonic wars. Although it was abolished in 1816 (the year after the Battle of Waterloo) it was re-introduced in 1842 by Sir Robert Peel to fund a growing budget deficit (sounds familiar!) and has been with us ever since. We have to tell you it is most unlikely that they will ever get rid of it now!

Tax Returns

The deadline for filing your 2012 tax return is 28th January. Any tax returns submitted after this date will incur an automatic £100 late filing penalty. You must also file them on-line. The deadline has already passed for paper tax returns, so any filed now will also incur a £100 penalty even if you do not owe any tax.

On-line filing is very easy to set up. Just go to www.hmrc.gov.uk and click on Register in the Do it Online panel. However, you must give yourself at least 7-10 days as they will send you an Activation PIN by post. You need to enter that PIN within 28 days.

Make a note of your User ID and Password too as you will need these every time you log on. Your tax advisor will also need them if they are filing on your behalf.

Acumen Tax Solutions guarantees to file your tax return on-line by 28th January provided you give us all the necessary details by 5pm on 25th January. Our fees are very reasonable and are fixed according to the amount of work to be done. However, you will not be surprised to hear that fees go up in January as it is the busiest time of the year for tax returns. If you leave it to the last minute you will probably pay about double the usual fee, so best to get your skates on!

Tax Data
Income tax rates

2011/13 Allowances

Tax Return 2011/12

Information Sheets Tax Tips
bulletpoint Pensions
bulletpoint Gift Aid
bulletpoint Venture Capital Trusts
bulletpoint Enterprise Investment Schemes
bulletpoint Premium bonds
bulletpoint Employment expenses
bulletpoint Salary sacrifice schemes
bulletpoint Spouse transfers
bulletpoint Let Property Campaign
bulletpoint Second Incomes Campaign
Spouse transfers
If your spouse is on a lower rate of tax, consider transferring investments to him/her or putting them in joint names.
Watch your tax code
If your tax code is wrong you could end up paying too much PAYE so query any unusual items with the Revenue.
Employment expenses
Make sure you claim all allowable expenses such as mileage or professional subscriptions on your tax return.
Negligible value assets
If you own shares that are now worthless claim for their original cost against income tax.
Non-resident status
If you spend most of your time outside the UK make sure you don’t lose your non-resident status by coming back too often.
Salary sacrifice schemes
Talk to your employer about taking some of your salary as tax free benefits like childcare vouchers or higher expenses.

Reducing your Tax Bill

The potential for reducing your tax bill depends very much on whether you run your own business or not. Most people don’t, and if you are an ordinary employee or pensioner there is not much you can do to mitigate your income tax liability beyond the few available reliefs already promoted by the Government. However, with a bit of foresight and planning, you can still reduce your tax bill quite substantially by employing the following techniques:

  • put money into pensions and other tax free investments such as ISAs, EIS and VCTs
  • make use of all available allowances, such as the annual capital gains tax exemption
  • make use of all available losses from part-time self-employment or selling shares, etc
  • split investment income, property income and capital gains between husband and wife
  • explore salary sacrifice arrangements with your employer in exchange for tax free benefits

Click on the links above to discover more

Example

Harry earns £60,000 a year in his regular job and has savings of £50,000 which are currently sitting in a bank account earning 3% interest. He is 50 years old and pays £2,880 per year into a stakeholder pension and £3,600 per year into a cash ISA.

If he leaves things as they are his tax payments would be as follows:

Salary - £60,000
Interest - £1,500
Gross income - £61,500
Personal allowance - £7,475
Taxable income - £54,025

Income taxed at basic rate - £38,600 x 20% = £7,720
Income taxed at higher rate - £15,425 x 40% = £6,170
Total tax paid = £13,890

If he pays £25 per month to a registered charity, invests £10,000 of his capital in a personal pension, £20,000 in a VCT and an extra £1,740 in his cash ISA, his tax payments would fall as follows:

Salary - £60,000
Interest - £547
Total income - £60,547
Personal allowance - £7,475
Taxable income - £53,072

Income taxed at basic rate - £51,475 x 20% = £10,295
Income taxed at higher rate - £1,597 x 40% = £639
Less: VCT investment - £20,000 x 30% = £6,000
Total tax paid = £4,934

Harry has managed to reduce his tax payments by £8,956.

Of course, the tax relief on the lump sum pension contribution and on the VCT investment is a one-off, but he will also get tax relief on dividends paid by the VCT and will be exempt from capital gains tax when he disposes of his investment.

For the self-employed a whole new world opens up for tax planning. For the object of this exercise, being self employed is taken to mean any type of business entity, for example sole traders, partnerships and limited companies. Click on our Self Employment page to discover more about the various things you can do.

Give us a call if you would like us to work out a personal tax strategy for you.

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