How to make tax less taxing

As the effects of the recession rumble on, the mantra of ‘every little helps' has become more important than ever. Yet despite this, millions of Brits are losing money by making unnecessary gifts to the taxman - simply through poor financial planning. Research from Unbiased.co.uk, the professional advice website, reveals four out of five people (81%) admit to doing nothing to reduce their tax payments, amounting to an overall tax wastage of over £10 billion in 2009, according to Unbiased.co.uk's latest Tax Action report.

Unbiased.co.uk urges consumers to take tax action by bringing you ten top tips on how to become more tax efficient with your personal finances.

1. Daniel Clayden, Clayden Associates - PAYE

"If you are receiving any income through PAYE (i.e. if you're employed or in receipt of a pension) you should always ensure you are on the right tax code. Most of us assume that if tax is being deducted at source, it must be right - but believe it or not HMRC do get it wrong sometimes. And if your tax code is wrong, its means that you'll either be paying too much or too little tax. The good news is that if you've been paying too much, you can claim this back up to 6 years after the mistake is identified. If on the other hand you've been paying too little, it's far better to sort the problem out sooner rather than later in order to avoid being lumped with a hefty tax bill. If you want to check your tax code is correct, request an up to date 'Notice of Coding' and check the details to make sure it's right.

2. Joss Harwood, Eldon Financial Planning - AGE ALLOWANCE FOR OVER 65s

"Age allowance is an important tax benefit for individuals over age 65. However, it is very often not correctly applied in tax coding or is needlessly lost because taxable income is higher than it might be with a little careful planning. In this tax year, a further £3015 is potentially free from income tax for those aged between 65 and 74, and £3165 for those over 75. This means that for those with income of less than £22,900 the benefit is up to £633.

"The downside is that once your income goes over £22,900, the extra tax allowance is progressively removed until in the case of the over 65s, it is lost completely at £28,930, and for the over 75s, at £29,230. It is also worth noting there is still a married couple's allowance for couples and civil partners where at least one of you was born before 6th April 1935. This is worth between £653 and £662 in the tax year."

3. Danny Cox, Hargreaves Lansdown - PERSONAL ALLOWANCES

"The taxman is not totally heartless. You are allowed to have taxable income of £6,475 a year before you start to pay tax. This rises to £9,490 when you are aged 65. It is important to make best use of these tax allowances - and between a couple this means you could receive around £19,000 of income per year, before you start to pay tax.

"There are two very effective ways of maximising your personal allowances. Firstly, if you are married, hold your savings and investments in the name of the person who pays the least amount of tax - this is also known as equalising your income. A basic rate taxpayer loses 20% of the interest from their savings, where as a non-taxpayer loses nothing. Over time this makes a big difference to your returns. Secondly, plan ahead. If you work out that one spouse will have little income when they retire, start saving in their name now. Pensions are perfect for non-taxpayers since they enjoy tax relief on the contributions and potentially the income in payment could be tax free if within their personal allowances."

4. Chris Wicks, N-Trust Limited - COMPANY CARS

"If you have a company car, check whether you would be better off owning your own car and having a mileage allowance. You can be paid up to 40p per mile for the first 10,000 business miles - completely free of tax. By way of example, take a Ford Mondeo 1.8 diesel bought this year for £16,000 with a business mileage of, say 12,000 miles. If provided as a company car including private mileage, this will add a notional £5,780 to your income on which you will be liable to tax of £1,156 if you are a basic rate tax payer or £2,312 if you are a higher rate tax payer. If, on the other hand, you owned the car and your employer paid you a mileage allowance of 40p per mile for the first 10,000 business miles and 25p per mile for the next 2000 miles, you would receive £4,500 tax free. When you count the tax reduction you would have an extra income of between £5,616 and £6,812 with which to acquire your own car. I estimate that the car would cost around £6,400 per year in total. This means that you would make something of a saving as a higher rate tax payer and this would be improved if your business mileage is higher than in the example used. If you travelled say 30,000 miles your tax free allowance would be £9000. However, bear in mind that you would need to replace the car more often and the extra mileage would be reflected in the depreciation."

5. Jason Witcombe, Evolve Financial Planning - PENSIONS

"There is a general misconception that retirement planning means automatically paying money into a pension. The key to a financially secure retirement is simply having enough money. It doesn't really matter whether it is in a pension, an ISA, an investment portfolio or even cash under the mattress, although we wouldn't necessarily recommend the latter! Therefore, we would advise that people are not too rigid in their strategy for saving towards a comfortable retirement and instead are open to the options available for them.

"The most efficient way of saving into a pension is to receive higher rate tax relief on your pension contributions but to only pay basic rate tax on your retirement income. When you bear in mind that you can currently take out up to 25% as tax free cash at retirement as well, you have a tax break that is very hard to ignore. Someone who is a basic rate taxpayer now but who expects to be a higher rate taxpayer in the near future might be advised to hold off on pension contributions. It might seem counterintuitive to delay pensions - the normal story is that you should start early to benefit from year on year of rolled up returns - but such a strategy can work really well in certain circumstances."

6. Steve Laird, Carrington Wealth Management - OVERSEAS RETIREMENT

"Tax rules vary greatly from country to country, and in a time of reduced investment returns it's important to make sure you are not paying too much tax if you are planning to move abroad. Investments which are traditionally tax-efficient in the UK, such as ISAs and pensions may not be at all tax-efficient in your chosen destination so it pays to take advice from a suitably qualified and experienced adviser before you leave the UK. If you take retiring to Spain as an example, the tax-free lump sum from your pension plan will not be tax-free once you are based there, so make sure you take it before you leave. Annuities, where you use your capital to buy an income, can be very tax-efficient in Spain, particularly for the over 60s. ISAs are not tax efficient for people who move to Spain permanently but there are alternative investment products, offered by providers some of whom are well-known to UK investors, which can reduce your tax liability substantially. If you invest in these products you pay little or no tax unless until you make a withdrawal of income or capital. This helps your money to grow more quickly and hence produce a greater income when you need it later on."

7. Jason Butler, Bloomsbury Financial Planning - REPAYING DEBT

"If you have any source of debt which is not tax relievable, such as a mortgage or unsecured loans or credit cards, then it is more tax efficient to use any spare cash held on your deposit to reduce or repay that borrowing. This is because interest on cash is taxed at 20%, 40% or, for those earning more than £150,000 from next April, up to 50%, thus eating into a large amount of the total return - compared to the cost of interest paid by you on borrowing. If you pay, for example, 4% in interest on a mortgage, then a basic rate taxpayer would need to earn 5%, a 40% taxpayer 6.66% and a 50% taxpayer 8% on a deposit account before tax to make it cost neutral. There is no point in earning taxable interest which is less after tax than the cost of borrowing. The higher the tax rate and the higher the cost of borrowing then the more attractive repaying debt becomes."

8. Gordon Bowden, Quainton Hills Financial Planning Ltd - NATIONAL SAVINGS INDEX LINKED CERTIFICATES

"Always consider National Savings Index Linked Certificates as part of an investment portfolio. Up to £15,000 can be invested in each issue. There are typically two issues available; a 3-year term and a 5-year term. Guaranteed inflation proof returns, 100% secure as backed by the government and tax-free returns."

9. Peter McGahan, Worldwide Financial Planning - OFFSHORE BONDS

"Very often a simple tax free investment is missed. It is very difficult to plan for any investment too far in advance so flexibility is required. Consider, therefore, saving into an offshore bond. Apart from a small element of withholding tax, all growth remains free of tax within the plan as it grows and any movement of any investments inside the plan will not be liable for capital gains tax.

"When the investor needs the money they will then be in a position where tax may be payable but this is where the plan becomes clever. Gains in the investment are assessed against income tax. So consider that at age 18 your child needs to go to university. You would then assign a segment of the plan to your child and the gain would be assessed against their income tax. As long as the gain is less than the income tax allowance they will not be taxed.

In the second year of university they could do the same thing again and so on. And so there would have been tax free growth and tax free distribution. Furthermore the child could do a gap year or even move abroad and the bond could be segmented again and they would now be accessing it tax free as they would be non resident. If you haven't used the bond in its entirety and there was a sizeable gain you could become non resident for a year by taking a long holiday of at least 6 months and then encash the bond and it would not be assessed against UK tax."

10. Rob Simpson, Simpson Financial Services Limited - SALARY SACRIFICE

"Salary Sacrifice is an arrangement between you and your employer where you give up the right to a specific amount of salary increase or bonus in exchange for a non cash benefit such as an employer pension contribution. The first tax efficiency benefit is that you and your employer can both save money on National Insurance Contributions. Secondly, your employer saves Corporation Tax, and finally, you will pay lower Income Tax as your earnings are reduced.

"A reduction in salary may seem unappealing but you have to consider the tax saving benefits. These arrangements can be structured so that the tax savings can be reinvested into your pension arrangement giving you a higher pension contribution and thus your take home pay actually increases. For example, someone earning £20,000 per annum who is willing to sacrifice 5% of their salary could gain £110 per annum extra take home pay, £128 per annum extra pension contribution and there would be no additional cost to the employer's payroll bill.

"There are a number of options available to you and your employer when considering tax savings produced through Salary Sacrifice. Importantly, Salary Sacrifice arrangements are a matter of employment law and not tax law. It is also crucial that they are set up correctly so that they can be treated as "effective" by HM Revenue and Customs so we recommend that you and your employer seek professional advice."

Karen Barrett, Chief Executive of Unbiased.co.uk, comments: "As unemployment levels continue to rise and savings levels suffer, now is not the time for consumers to be complacent when it comes to their personal finances - yet as a country we continue to gift huge sums in unnecessary tax payments to the taxman. Tax can seem a complex issue and especially in the current environment many people are nervous about making the wrong financial decisions. An independent financial adviser can assess your entire financial position and ensure you are being as tax efficient as possible.

"To find an independent financial adviser who can help you with your tax planning, go to Unbiased.co.uk to ‘find an IFA'."