You don't have to practise evasion, or even go to a haven - just make a simple tax saving

Sam Dunn looks at how to bring down your Inland Revenue bill
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The Independent Online

Channel Islands bank account and a discreet air are no longer de rigueur for those seeking to shelter their money from the taxman.

Instead, there are less exotic, and less complicated, ways to bring down your debt to the Inland Revenue. They all go under the banner of "tax avoidance" - as opposed to tax evasion, when people hide their income from the authorities -and they are all legitimate.

"Tax avoidance is about reducing your bill legally," says Andrew Shaw, personal tax specialist and partner at Kingston Smith chartered accountants. "Depending on the way you look at it, most people would not categorise putting money into an individual savings account [ISA] or pension as such, but it legitimises tax avoidance."

As Francesca Lagerberg, national tax director at professional and financial services group Smith & Williamson, says: "There aren't that many tax breaks out there, so use what you can."

Reviewing your tax affairs every couple of years at the very least may sound like a drudge, but the potential savings are enormous.

Personal allowances

Each year, a sum of £4,615 slips into your wages tax-free. If you earn less than this, ask your bank for an IR85 form, which exempts you from paying tax on interest earned on savings.

If you are retired, you get a bigger personal tax allow-ance: £6,610 for those aged between 65 and 74, and £6,720 for the over-75s. If, however, your retirement income is over £18,300 a year, be aware that every pound over this amount brings down your allowance on a sliding scale towards the £4,615 minimum.

Tax-free savings

Everyone can invest up to £7,000 in an ISA tax-free each year. You can put all your money into shares through a maxi ISA, or spread the risk and divide it up between cash, insurance bonds and stocks. With a mini ISA, you can choose different providers for each of the three investments.

Tax perks

If you invest in an equity ISA, be aware that a tax perk - a dividend credit giving you back 10 per cent - is to be abolished next April. But ISAs where at least 60 per cent of the fund is invested in bonds will be eligible for a 20 per cent tax credit.

Investment bonds with life insurers also offer benefits in that top-rate earners can defer paying tax if they cash in up to 5 per cent of their investment each year. And since many higher earners go on to become basic-rate taxpayers - people living on retirement income, for example - they won't have to pay the tax they'd originally deferred.

National Savings

A number of these government-sponsored savings products are tax-free, including premium bonds and index-linked savings certificates.

New rates announced by National Savings last week include 3.4 per cent on its five-year fixed-interest savings certificate. For a higher-band taxpayer, this is equivalent to a gross rate of 5.67 per cent.

Pensions

Using part of your salary to build up a pension pot earns tax relief.

If you are a basic-rate payer, the government will contribute 22p for every 78p you put into a company or personal pension scheme. Higher-rate payers enjoy the same break but can claim back another 18p from the Inland Revenue when filing a tax return.

Inheritance tax planning

Death duties can create huge inheritance tax (IHT) bills that eat into your legacy, with the Inland Revenue taking 40 per cent from an estate worth more than £255,000.

By giving away a gift of any size - property, car or cash - you can cut down on potential tax bills as long as you live for seven years afterwards.

Separately, as much as £3,000 can be handed over free of IHT in any tax year to individuals of your choice, and up to £250 given to any number of people.

Capital gains tax

Make use of your capital gains tax (CGT) allowance each year, currently £7,900, to reduce the bill for cashing in any profit from large investments such as a shares portfolio or property.

"Even if you think you have to pay a lot of tax on the sale of a second home, you can reduce the bill if it has been your main residence at some point," says Ms Lagerberg at Smith & Williamson.

On a shares portfolio, your CGT bill can be slashed by selling off chunks across different tax years, or, if you are married, by making use of your spouse's CGT allowance.

Filling in your tax form

Get your self-assessment return into the Inland Revenue before 31 January, accurately completed along with a cheque for any tax you owe, and you will avoid an automatic penalty of £100. Interest is also charged on any outstanding unpaid tax.

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