We all know that tax evasion is illegal, but in these straightened times tax avoidance, where the aim is to minimise tax whilst remaining within the law, is increasingly under the spotlight. Just last week, Google was fiercely criticised for paying just £3.4m UK tax on £3.2b sales, hot on the heels of Amazon and Starbucks also lambasted for sheltering multi-million pound UK profits from UK tax through corporate manoeuvrings in tax havens. Wealthy individuals have not been immune either from this focus on the morality of paying a fair share of the tax burden. Last year, the entertainer Jimmy Carr was exposed for allegedly paying just 1% tax on earnings.
The BBC has commissioned a ComRes survey showing that 84% people favour a clampdown on tax avoidance. With such popular support, the government has acted and it is widely expected that a General Anti-Avoidance Rule will become law in July to deal with artificial and abusive tax avoidance schemes. National Insurance loopholes are being closed too, such as the use of offshore payroll services.
So what can we do to reduce our annual tax bill so as to stay within both the letter and spirit of the law? Assuming that a couple has made best use of personal allowances and basic rate tax bands, ISAs are an excellent way to save up to £11,520 each tax-free. Furthermore, stock markets have risen strongly over the last year, so it may be possible to crystallise tax-free gains of £10,600 each using the Capital Gains Tax annual exemption.
For retirement savings, pensions remain a fantastic tax shelter. Earnings up to £50,000 can be saved in a pension this year with full tax relief and tax-free growth. A pension offers a business owner a great way to extract profits tax-efficiently and build a retirement fund too, including the purchase of business premises.
For more sophisticated investors, the government offers valuable tax breaks for new investments into small companies. Whilst consideration of the underlying investments is paramount, Income tax and CGT relief of 50% for a Seed Enterprise Investment Scheme, or tax-free dividends from Venture Capital Trust should not be dismissed lightly.
In summary, the increasingly punitive tax system and focus on tax avoidance highlights the importance of regular reviews to ensure that tax planning and mitigation is appropriate and optimised as an integral part of your financial planning.
[Matthew Clark, Western Morning News, 23 May 2013]