Six steps to minimise your tax bill

Still havent filed your tax return? The clock is ticking, but Sean Jones of James Hambro & Partners has a solid action plan.

Last year, nearly 750,000 people missed the deadline for filing their tax return – potentially having to pay a £100 fine. Moreover, just over 30,000 filed in the final hour.

One of the dangers of leaving it to the last minute is that you increase the likelihood of overpaying tax. Taking advantage of all the available tax reliefs can be time-consuming, and a financial adviser and accountant can often end up more than covering their costs in helping you. 

If you have not yet filed this year’s returns, here are some things to consider.

1. Claim expenses to reduce your ‘taxable income’

If you work from home or are self-employed, you may be able to claim business running costs against income for travel, office supplies, and phone, insurance and energy bills.

People who run their own businesses are able to spend up to £200,000 a year on plant and machinery and offset this against their tax bill.

Keep track of your travel. Employees may be able to claim back petrol costs if their employer does not give them a mileage allowance, or if there is a shortfall between what their employer pays and HM Revenue & Customs’ approved mileage rates.

2. Make charitable donations even more rewarding

Make a note of donations that you have made through Gift Aid. High earners can claim back the difference between the basic rate of tax and marginal rate of tax they actually paid – usually by reducing their income tax bill.

Remember that taxpayers can donate to a charity now and have the tax relief applied to their return covering the last financial year (2017-18). This is useful if you are a lower-rate taxpayer this year, but last year you were a higher-rate taxpayer (40%) or additional rate (45%) taxpayer. 

3. Don’t forget to claim relief on pension contributions

Higher-rate and additional-rate taxpayers can claim tax relief at their marginal rate on their pension contributions, but only the basic-rate tax relief of 20% is added to pension contributions by providers at source. To enjoy the full benefit, you have to remember to claim back the extra relief from HMRC in your tax return.

It is estimated that thousands of people forget to do so. If you have failed to do this in previous years, you can claim retrospectively. It is probably worth seeing an accountant and getting some help in calculating the sum owed.

4. Buy-to-let mortgage interest tax relief is not dead yet

If you pay tax at 40% or above and are a buy-to-let landlord you can still claim tax relief on 75% of any mortgage interest payments, although this is being phased out and will be gone by April 2020, to be replaced by a new flat 20% tax credit. 

You also have a new extra tax-free allowance of £1,000 for property income, which you can use to offset income from a buy-to-let (there is one for “trading income” too, designed for those doing e-trading on platforms such as eBay, but covering other areas, too.)  

5. Make the most of your spouse or civil partner

Marriage allowance may allow you to transfer £1,150 of your tax-free personal allowance to a higher-earning spouse or civil partner, which is useful if one partner has not used up all their personal allowance.

6. Tax-efficient investment schemes

Venture Capital Trusts offer 30% tax relief on up to £200,000 and raise money to invest in early-growth companies.

Additionally, another effective relief for some people is the enterprise investment scheme (EIS). The scheme allows you to invest up to £1 million in high-risk small companies (or £2 million in companies that qualify as “knowledge-intensive”) in any tax year and receive up to 30% income tax relief on this sum.

A similar scheme, called the seed enterprise investment scheme, allows people to invest up to £100,000 a year in early-stage companies and receive initial tax relief of 50% on their investments.

Such schemes may sound attractive, but returns can be disappointing in the long run, and expenses high. Before investing, be sure that there is a strong investment case and take advice.

Tax return essentials

The deadline for submitting online tax returns and paying tax owed is 31 January 2019.

 Before you start filling out the return, it is worth getting together all of your documents to ensure that you are clear about your total income, gains and deductions.

 In this case, income includes interest on UK bank accounts, untaxed foreign interest of up to £2,000, dividends over £5,000, foreign dividends up to £300, state pension and other pension income, capital gains over £11,100, and income from buy-to-let properties.

 You will also need to provide several pieces of identification such as your passport, bank details and National Insurance number.

Why you shouldn't leave it to the last minute

You can be fined a £100 penalty for late filing during the first three months after the deadline. After three months, HMRC can demand an additional £10 a day up to £900.

If you still have not filed the return six months after the deadline, you will either be fined £300 or 5% of the tax due – whichever is higher – on top of the existing penalties. Carry on failing to file a return and, in very serious cases, you could even be fined 100% of the tax due.

There are some “reasonable excuses” that HMRC may accept as cause to waive any penalty. These include things such as the recent death of a partner, an unexpected hospital stay or service issues with the tax authority’s online services.

Sean Jones is a financial planner at James Hambro & Partners.

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