Tax


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There are three great wealth destroyers.  They are debt, inflation and taxes.  The bad news is that they are all virtually unavoidable.  The good news is that if you understand them, you can position yourself so that they have the least possible impact on your income and wealth.

Tax is a large, complex and ever-changing area.  Everyone should be as educated as possible regarding:

  • What their tax liabilities are

  • What tax benefits they may be entitled to

  • How to be as tax efficient as possible

  • How to manage (personal / business) accounts

To quote Scottish Politician and Judge Lord Clyde (1863 – 1944)...

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue."

In other words, the Inland Revenue will not be slow in taxing people or business entities to the full extent of the law.  We strongly believe it is ones personal responsibility to educate themselves (or seek professional advice) to position themselves to be as tax efficient as possible.

>>> Speak to one of our qualified tax advisers

Types of Tax

You may be able to think of lots of different taxes:

- Income tax
- National Insurance
- Council Tax
- Capital gains
- Corporation tax
- Inheritance tax (IHT)
- Stamp duty / land tax
- Value added tax (VAT)

...the list goes on!  However, all taxes are ultimately classified as either direct or indirect taxes.

A Direct Tax is a tax that is levied directly off of an organisation or an individual person e.g. income tax or National Insurance.  In other words, it is collected directly by government from the persons (legal or natural) on which it is imposed.

An Indirect Tax (such as sales tax, VAT, or goods and services tax) is a tax collected by an intermediary (e.g. a retail store) from the person who bears the ultimate economic burden of the tax (the customer).

Direct taxes are virtually unavoidable if you earn an income or make a profit, whereas indirect taxes are avoidable in the sense that you can choose what you buy.

Your Tax Liabilities

Your tax liabilities will depend on your personal circumstances, such as how much income you receive, what type of income (e.g. salaried, self-employed, dividends) and what you spend money on.

There are definite tax advantages of being self-employed or a business owner.  The main advantage is that self-employed people and business owners pay themselves first and then pay tax.  Employed people pay taxes and then get paid what's left.  Most self-employed people and business owners also pay less National Insurance contributions.

To learn more about tax liabilities, please visit the tax section of the website.

Tax Benefits

Tax benefits can be either credits or incentives from the government.

Tax credits include:

  • Working Tax Credit: tax credit available to working families who are responsible for at least one child under 16 (or under 19 if in full-time education up to A-level or equivalent standard)

  • Child Tax Credit: tax-free payment that you can claim for your child(ren)

  • There are also other tax credits available for certain people which include job seekers allowance, housing benefit, income support and state pension

Tax incentives include:

  • ISA's: allow you to build up savings and equity without any tax liability

  • Pensions: the government will contribute to your personal pension contributions at your income tax rate.  For example, if you are a basic rate tax payer (20% in 2009/2010) then for every £80 you pay into a pension, the government will pay in £20.  Your contributions are therefore effectively 'grossed up' 25% (£80 x 25% = £20)

  • There are also other tax incentives for people and businesses including running lower carbon emission (CO2) vehicles, developing landfill or brownfield land, research and development tax incentives, small business rate relief etc.

>>> Learn more about tax incentives and tax benefits

How to be Tax Efficient

When it comes tax, most people want to know how they can legally pay less - in fact, as little as possible.  This is perfectly acceptable if it is lawful and is called tax avoidance.  Simply refusing to pay tax that is payable under the law is called tax evasion which is illegal and could result in heavy fines or imprisonment.

The reality is that some people earn very mediocre incomes but end up paying a large proportion of it on direct taxes (income tax and National Insurance), usually nearly 30%.  Employed people in the higher tax bracket will pay nearly 50% of their salary in taxes.

Business owners on the other hand can make profits of hundreds of thousand of pounds or more yet pay very little tax.  Whether you believe this is fair or not, it is reality and there is probably nothing you can do to influence tax law.  You are best advised to learn about it and then work the system to your fullest advantage.

Quick Tips:

  • Being a business owner or self-employed is almost always a lot more tax-efficient than being employed.  From a tax perspective, move towards being self-employed or a business owner

  • Learn how to manage your personal (and business) finances, which includes setting money aside for tax liabilities

  • Hire a good accountant and independent financial adviser

  • Learn about various government tax shelters that may be available to you e.g. capital gains allowance, ISA's, pensions, gifts, spouse transfers etc.

  • Claim any tax credit you may be entitled to.  Nine out of ten families are eligible to claim Child Tax Credit, yet 10% never claim

  • If you're self-employed or a business owner, consider becoming VAT registered if possible.  This will allow you to charge VAT and claim back VAT on purchases made for your business.  We advise you to seek advice from a good accountant

You can receive more money saving and tax tips by subscribing to our free monthly Money Advice Newsletter.

How to Manage Accounts

Managing accounts was mentioned in the managing money section of the learning zone.  Whether you're managing your personal finances or business finances or using a book-keeper or accountant, it's important you know what your financial position is and what's coming in and going out so you know what your potential tax liabilities are.  Only then can you decide (perhaps with the help of an accountant) what your tax strategy is.

One of the main benefits of managing your accounts (or at least getting involved) is you get to really know where the money is going.  You can then make intelligent decisions about how to minimise expenses, as well as increasing income.

>>> Download your free personal finance spreadsheet

Conclusion

Make a decision to be as tax efficient as possible in order to retain as much income and wealth as possible.  Learn as much as you can about how tax effects your personal financial plan and then where and when appropriate, hire a good accountant.

You can learn more about tax in the tax and legal section of the website.

 

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