Effective tax planning can help families to save thousands of pounds each and every year. Taking advantage of a personal allowance means that someone is able to pay less tax, meet rising household bills and save additional money for the future. The majority of tax breaks are in-place to encourage families to do just that. For example, pension contributions are not only a means of tax avoidance, they also help families make suitable retirement provisions.
What is Tax Planning?
Professional tax planning or tax avoidance involves minimising or deferring the amount of taxation paid in a legally compliant way. It involves making a series of fundamental changes to the way a family uses and receives their money. It must be distinguished from tax evasion as this can result in serious legal consequences, such as imprisonment.
Pay Less Tax by Increasing Pension Contributions
Making adequate retirement provision is an important part of tax planning. Pension contributions are vital as they ensure that a senior has a sufficient retirement income. Higher-rate tax payers enjoy significant tax relief; for every £60 contributed, £100 goes into the pension pot. The percentage of a salary that can be contributed increases with age.
Inland Revenue rules permit people that don't work to pay up to £3,600 per annum into a stakeholder pension plan. This is an important part of tax planning for married couples, especially when only one person is a wage earner. Once retirement age is reached, 25 per cent of the pension fund can be received without paying further taxation.
Individual Savings Accounts (ISA's)
An Individual Savings Account (ISA) allows individuals to save up to £7,200 per annum. An ISA helps with tax planning as the returns are completely tax-free. Married couples should utilise each of their respective ISA allowances and pay less tax than they would in a conventional savings account.
Friendly Societies and Tax Exempt Savings Plans
Friendly Societies are a long term savings plan that helps with tax planning. Although Inland Revenue (IR) rules only permits people to save up to £25 per month, Tax Exempt Savings Plans allow people to pay less tax. Upon maturity, any returns are completely free of Capital Gains Tax (CGT).
Pay Less Tax and Utilise Personal Allowances
Both husband and wife have a personal allowance; this means that each person can earn a certain amount of money before they have to pay income tax. Families that have utilised Individual Savings Accounts, Tax Exempt Savings Plan and other allowances should transfer some of their savings into the names of family members that aren't currently earning an income.
Whole of Life Insurance Policies
The use of a whole of life insurance policy is often connected to estate planning. They form an intricate part of tax planning as the proceeds of life insurance can be paid into another family members name without the payment of inheritance tax. This can financially benefit families considerably following a bereavement as the rate of inheritance tax is 40 per cent.
Child Trust Funds (CFT's)
The government introduced Child Trust Funds (CFT's) to help give young people a start in life. They provide a £250 voucher for every child. However, it is possible for parents to pay up to £100 per month into a CFT fund and benefit from tax relief when helping provide for the child's future.
Tax planning is vital, especially for higher-rate tax payers. It is particularly important to contribute a sufficient amount in pension contributions in order to pay less tax and ensure an adequate retirement income. An Individual Savings Account is always preferred to a regular savings account because it allows savers to enjoy a tax-free income.
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