5 Ways to Minimise Your Tax Footprint (UK)

Here at the DIY Income Investor we don't believe in paying more tax than we have to - it can make the difference between keeping up with inflation or not. We have talked about minimising the amount of tax liability before - but as it is nearing the end of the tax year (in the UK, at least), it is worth revisiting this topic and minimising your tax footprint.

As a recent article in This is Money has highlighted, there are steps you can take to legally reduce the amount of tax you pay.

1) Switch Assets with Your Spouse

Switching savings or investments with your spouse can reduce a couple's overall tax exposure. Everyone is taxed on their own income but also has a personal allowance (including the higher age-related income tax allowances) - the portion of income you can earn before tax. If you pay tax but your partner does not, it makes sense to give them income-producing assets to help use up their allowance. Likewise, there is a saving if one partner pays higher rate tax and the other doesn't - or if one partner has other allowances .

 

In addition, if you have children, the UK Government still plans to strip Child Benefit from those who pay tax at 40% by 2013.

2) Use an ISA
 
Topping up ISAs is a regular end-of-tax year routine for many savers. A 'stocks & shares' ISA allows money to be paid into a tax-free deposit account or to be invested in shares or bonds, with no further tax on any income or growth. The proceeds can be left off your Income Tax return and will not count as income against any other tax allowances.

3) Use Your Capital Gains Tax Allowance

If you already have investments that are outside an ISA, the annual Capital Gains Tax allowance means that you can sell these and crystallise a profit (if you have been lucky) up to the annual limit. So this is a good time to consider selling investments and re-investing in an ISA next tax year (assuming you haven't already used your current ISA allowance.
 
4) Save in a Pension
 
Although you cannot access your pension fund until you reach the minimum age, putting income into a pension can significantly reduce the income tax that you will pay on it - particularly if you are a higher-rate tax payer. You can also save in your spouse's pension fund - or set up pensions for your children.
 
5) Give to Your Family and to Charity
 
If you are systematic about it, you can give quite a lot to your heirs as lifetime gift without incurring Inheritance Tax liability.  For example, you (and your spouse) can give £3,000 a year.
 
Through Gift Aid you can also give tax-effectively to charity - reducing the tax liability of both the charity and yourself. 

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.