How to cut your tax bill

Ed Bowsher looks at five different ways you could reduce your tax bill.

Nobody enjoys paying too much tax, but some people end up paying too much anyway.

In this video I look at five different ways you could potentially reduce your tax bill. A couple of them are fairly well known but at least one of them isnt well known at all.

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The first one I'm going to look at I'm calling plan with your spouse', so obviously it only applies to married couples. It only really works for couples where one spouse is a high-rate taxpayer and one is a basic-rate taxpayer.

Let's imagine I earn £30,000 a year. I don't, but let's just go with that for now. That means I'm a basic-rate taxpayer. Let's imagine my wife earns a lot more than me. She earns £100,000 a year. Again, she doesn't. So she's a high-rate taxpayer paying 40% income tax a year.

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Let's also imagine that my wife has a £100,000 cash savings pile and I've got no cash savings at all. So she's paying 40% income tax on the interest she receives. So she gets £3,000 interest on her £100,000 savings pile. She pays 40% income tax on that interest £1,200 on income tax.

If my wife trusted me and gave the £100,000 to me, I'd only have to pay basic rate income tax on that £3,000 interest. I'd only pay £600 in income tax and my wife and I have saved £600 in tax. Very nice.

Next, what I'm going to look at is paying extra contributions into your pension a very popular way to reduce your tax bill. So let's say again I'm earning £30,000 a year. I make an extra £1,000 contribution into my pension. That reduces my taxable income from £30,000 to £29,000. I no longer pay any income tax on that £1,000. As a basic-rate taxpayer, that saves me £200. If I was a high-rate taxpayer, that would save £400. A nice way to save tax.

However, there is a downside. The problem with pensions is they're very inflexible, and most pensioners have ended up stuck in a low-paying annuity. But the chancellor has changed the rules you're no longer obliged to have an annuity. There is more flexibility, but it's still a relatively inflexible way to save money.

The plus point is you get these tax breaks; the minus point is you get inflexibility. So actually you need to think very seriously before you go down this road, but it will save you tax, that's for sure.

A more flexible way to save tax is to use an Isa. From July 1st this year, you're going to be able to pay £15,000 every year into your Isa. You could have all that money in cash, or all that money in stocks and shares, or something in between. A great way to save money. If you've got it all in cash, you won't pay any tax on the interest you receive. A great way to reduce your tax bill.

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The next one is one for the longer term. Inheritance tax. Now the interesting thing about inheritance tax is people who are quite rich often end up paying a lot of inheritance tax, but people who are very rich often end up paying very little. The reason for that is the very rich, high, good accountants who make sure they avoid the tax.

The two main ways to cut your inheritance tax bill is to use trusts or to make gifts at least seven years before you die. So you could give money to your children well in advance of your death and then no tax will have to be paid on that money.

The downside with the gifts is you may live longer than you expect. You may find that you run out of money, especially if you end up in a nursing home and your children might have spent all the money you've given them, and so you save tax but you've ended up in a pretty rotten place.

Trusts be can great but they're also quite complicated. So really I'd say if you want to pursue either of those strategies to reduce your inheritance tax bill, you probably should get some professional advice from an accountant or maybe a financial adviser.

My last strategy for reducing tax is a little bit more left-field. It's quite a new scheme. It's called SEIS. That stands for Seed Enterprise Investment Scheme. Basically it's saying if you invest in a really young start-up company, you can get some really generous tax relief. So if you invest a £1,000 in an SEIS eligible company, you'll get 50% relief on your income tax. So you invest £1,000, £500 comes off your income tax bill.

You can find out more about SEIS here.If you want to find eligible companies to invest in, you can do so by some of the crowdfundingwebsites that have come online in the last couple of years people like Cedars and Crowdcube. It's obvious. The tax relief here is absolutely fantastic. The downside is you're investing in very, very high-risk enterprises.

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So, fine, if you invest a £1,000, you'll save £500 on your income tax, but there's a good chance that the company you've invested in will go bust. You'll lose your whole £1,000 investment. You'll still £500 down. So to reduce the risk you should probably invest in a range of start-ups. Even then it's still very risky. So it may not be for you, but it is an incredibly attractive tax relief. That's for sure.

So that's a quick look at five ways to reduce your tax bill. There's actually loads more. I haven't had time to go through them all today, but I'll be back with another video soon. So until then, good luck with your investing.




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