HMRC clamps down on tax avoidance: 18 ways to pay less tax in 2018
It’s been reported by The Mirror that 129 footballers are being investigated by HM Revenue & Customs (HMRC) over £250m worth of investment in a tax avoidance scheme.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “In this instance the tax avoidance scheme cashed in on tax breaks for films. HMRC removed the tax advantages, and challenged film schemes it deemed were set up specifically to avoid tax.
“It’s part of enhanced anti-avoidance activities in recent years, which between 2010 and autumn 2017 have brought in an estimated £160bn in tax. Those who tried to take advantage now face paying the tax, interest and fines.”
Given the taxman’s clamp down on such schemes which means users are likely to repay close to what they put in, there are better ways to avoid tax.
Coles gives a run down of 18 ways you can take advantage of rules which have been set up specifically to enable consumers to save money:
To encourage saving and investing, the government offers the chance to save or invest £20,000 in this tax year – free of tax.
2) Lifetime ISAs and Help to Buy ISAs
In addition to the 25% bonus on contributions, there’s no tax on growth within these ISAs. If you have a LISA or a HTB ISA, the amount you contribute each year comes out of your overall ISA allowance.
3) Junior ISAs
In the current tax year, you can save or invest £4,260 in a JISA for any qualifying child, and all interest, dividends or capital gains are tax free.
Contributions to pensions attract tax relief at your highest marginal rate, and the first 25% taken from the pension is tax free.
5) Junior SIPPs
There’s tax relief on pensions even for non-taxpayers – on the first £3,600 of contributions. It means you can contribute tax-efficiently to a pension on behalf of a child.
Other savings and investments
6) Premium bond prizes
All prizes are tax free, which increases the attraction for higher rate taxpayers.
7) Bare trusts
You can invest on behalf of a child, using a bare trust, and all returns are counted as belonging to the child for tax purposes (so in most cases are tax free). The only exception to this is where parents invest and it generates income of £100 or more, in which case it is counted as belonging to the parents.
8) Venture Capital Trusts
The government offers a number of tax benefits to encourage people to invest in smaller, higher risk enterprises. There’s 30% income tax relief on newly issued VCTs – as long as you hold them for at least five years, no tax on dividends and no capital gains tax on profits.
9) Enterprise Investment Schemes
Similar benefits are available for investing in small companies eligible for EIS. You get income tax relief as long as you hold the shares for at least three years, and there’s no capital gains tax. It’s also exempt from inheritance tax, although any dividends are taxable.
10) Spouse exemptions
Assets producing an income can be passed between spouses without triggering a tax bill. They can therefore be shared between a couple, so that both take advantage of their allowances. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.
11) Marriage allowance
If one spouse is a non-tax payer, and the other is a basic rate taxpayer, the marriage allowance lets the non-tax-payer give £1,190 of their personal allowance to their spouse.
12) Use Capital Gains Tax allowances
Each year you can take some gains before being subject to capital gains tax – this year it’s £11,700. It’s therefore worth planning when you take gains in order to stay below the threshold in any one year. Your spouse also has an allowance, so you can share assets and both take advantage.
13) Spouse exemptions on inheritance
You can leave everything on death to your spouse, and no inheritance tax will be payable. You can simultaneously leave your spouse your inheritance tax allowance – so they have double the allowance when they eventually pass away.
14) Exempt gifts
You can pay less inheritance tax by giving away gifts throughout your lifetime. In most cases, seven years needs to pass before these are considered outside your estate for tax purposes, but there are exceptions. These include: gifts from income, some wedding gifts, and gifts of up to £250.
15) AIM Investments
AIM shares that qualify for Business Property Relief are inheritance tax free – as long as they have been held for two years.
16) Giving to charity
Leaving money to charity in your will can reduce your inheritance tax bill. Money left to the charity is not counted as part of your estate when assessing the tax due. If you leave at least 10% of the portion of your estate over your inheritance tax threshold to charity, you also cut your IHT rate from 40% to 36%.
17) Salary sacrifice
In some cases the government will let you give up a portion of your salary, and spend it on certain things free of tax and national insurance. This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes. You can therefore avoid both tax and national insurance on the money you spend on these things.
18) Company share schemes – Share Incentive Plans
Each year you can buy up to £1,800 worth of shares in a Share Incentive Plan out of your pay before tax and national insurance. They go into a trust, and as long as they stay there for at least five years, you keep these tax perks.