Paying less tax 2006 - 2007 for dummies by tony levene

19 Understanding the Inland Revenue’s Role...20 Administering and collecting ...20 Imposing penalties ...21 Coping as a Ratepayer...23 Getting help from the Inland Revenue ...23 Tracking

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About the Author

Tony Levene is a member of The Guardian Jobs & Money

team, writing on issues including investment and consumerrights as well as on taxation He has been a financial journalistfor nearly thirty years after a brief foray into teaching French

to school children Over his journalistic career, Tony hasworked for newspapers including The Sunday Times, Sunday Express, The Sun, Daily Star, Sunday Mirror, and Daily Express.

He has written eight previous books on money matters ing Investing For Dummies Tony lives in London with his wife

includ-Claudia, ‘virtually grown up’ children Zoe and Oliver, and catsPlato, Pandora, and Pascal

www.ebook3000.com

This book is dedicated to Claudia, who has shouldered many

of the household tasks I should have done during the writing

of this book – her unfailing good humour was 101 per centnecessary; to Zoe for her invaluable help in suggesting ideas;and to Oliver for making sure I kept to my deadlines I’d alsolike to thank my brother Stuart for keeping my computerworking and for letting me use the peace and quiet of hishome, where no one knew the phone number, for writingsome of the chapters

Author’s Acknowledgements

I would like to thank everyone at Wiley for their help andpatience In particular, Jason Dunne, who had the idea for thisbook and faith in me to ask me to write it; to Alison Yates, whoguided me during the early stages; and to Daniel Mersey, mymain editor, who has unfailingly responded to my blackermoments with light And an especial thank you to Kathleen,whose behind the scenes labouring turned my manuscriptfrom a book about taxation into Paying Less Tax For Dummies.

I would also like to thank my colleagues at The Guardian for

their patience and forebearance every time I mentioned ‘thetax book’

Most of all, however, I would like to thank all those who havehelped me over the years in understanding the complicationsand convolutions of our tax system They have to remainanonymous but besides accountants, they also include those

in the Inland Revenue that I have encountered both as a nalist and as a tax-payer

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Project Editor: Daniel Mersey

Commissioning Editor: Alison Yates

Executive Editor: Jason Dunne

Executive Project Editor: Martin Tribe

Cover Photo: © Image Source

Publishing and Editorial for Consumer Dummies

Diane Graves Steele, Vice President and Publisher, Consumer Dummies

Joyce Pepple, Acquisitions Director, Consumer Dummies

Kristin A Cocks, Product Development Director, Consumer Dummies

Michael Spring, Vice President and Publisher, Travel

Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies

Andy Cummings, Vice President and Publisher, Dummies Technology/

General User

Composition Services

Gerry Fahey, Vice President of Production Services

Debbie Stailey, Director of Composition Services

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Contents at a Glance

Introduction 1

Part I: Tax Basics 7

Chapter 1: Understanding the Process and Your Role in It 9

Chapter 2: Looking at the Players and the Process 19

Chapter 3: Organising Your Records 33

Part II: Tax, You, and Your Family 45

Chapter 4: Tying the Knot – Or Not 47

Chapter 5: Taxing from the Cradle to College 57

Chapter 6: Taxing Issues in Your Golden Years 73

Chapter 7: Preparing for the Inevitable: Death and Taxes 81

Part III: You Work Therefore You’re Taxed 97

Chapter 8: Working for Someone Else 99

Chapter 9: Paying on the Perks 113

Chapter 10: Sharing in Your Firm’s Fortunes 129

Chapter 11: Working for Yourself Can Be Less Taxing 141

Chapter 12: Considering Your Company’s Status 161

Part IV: Save on Your Savings and Investments 177

Chapter 13: Minimising Tax on Your Savings 179

Chapter 14: Taxing Investments 195

Chapter 15: Saving Tax with Bricks and Mortar 211

Chapter 16: Understanding Life Insurance and Tax 227

Chapter 17: Depending on Pensions for Your Retirement .243

Part V: Self Assessment and Getting Help 257

Chapter 18: Filling In and Filing Your Self Assessment Form 259

Chapter 19: Paying for Outside Help with Your Tax Affairs 275

Chapter 20: Dealing with an Investigation 285

Part VI: The Part of Tens 297

Chapter 21: Ten Top Tax-Saving Tips 299

Chapter 22: Ten Top Tips for Dealing with the Tax Inspector 305

Appendix: HMRC Helplines 311

Index 315

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Table of Contents

Introduction 1

About This Book .2

Conventions Used in This Book .3

Foolish Assumptions .3

How This Book Is Organised 4

Part I: Tax Basics 4

Part II: Tax, You, and Your Family 4

Part III: You Work Therefore You’re Taxed 4

Part IV: Save on Your Savings and Investments 5

Part V: Self Assessment and Getting Help 5

Part VI: The Part of Tens 5

Icons Used in This Book 6

Where to Go from Here .6

Part I: Tax Basics 7

Chapter 1: Understanding the Process and Your Role in It 9

Filing Facts 10

Distinguishing between avoidance and evasion 11

Putting the brakes on avoidance schemes 12

Moving to One-Stop Tax and Benefits Shopping 12

Laying Out the Basics of the Tax System 13

Considering Tax and Your Family 14

Looking at How You Pay 16

Saving Smartly 16

Investing for tax savings .17

Treating your home as your tax castle 17

Chapter 2: Looking at the Players and the Process 19

Understanding the Inland Revenue’s Role 20

Administering and collecting .20

Imposing penalties 21

Coping as a Ratepayer 23

Getting help from the Inland Revenue .23

Tracking down your tax inspector .25

Filing forms 27

Exercising your rights 28

Running through the Tax Year 28

Chapter 3: Organising Your Records 33

Looking at How the System Works 33

Keeping Good Personal Records 34

Identifying who needs to keep records 35

Sorting out what to keep .36

Deciding how long to keep tax records .38

Retaining Business Records 40

Asking for receipts 40

Keeping business records for a long, long time 41

Ensuring a part-time business follows the rules 42

Managing Your Record-Keeping 43

Part II: Tax, You, and Your Family 45

Chapter 4: Tying the Knot – Or Not 47

Getting Married 47

Becoming engaged 48

Anticipating changes to your tax life 48

Looking at what’s left of the married couple’s allowance 49

Maximising the Tax Benefits of Marriage 50

Sorting out your tax allowance .52

Swapping your assets 52

Inheriting each other’s assets 53

Taking a stake in a pension 53

Co-Habitating instead of Marrying 53

Breaking Up 54

Sorting out the tax bill 55

Paying and receiving maintenance payments 55

Chapter 5: Taxing from the Cradle to College 57

Becoming a Tax-Payer .57

Giving Money to Children 58

Giving money as a non-parent 59

Taking advantage of the small amount exemption 59

Saving Tax by Giving Wisely .61

Investing in single premium insurance bonds 61

Setting up a trust 62

Getting Money for Children .65

Benefiting from child benefit 65

Claiming child tax credit 66

Gaining a trust from the government 70

Receiving help with childcare costs 71

Chapter 6: Taxing Issues in Your Golden Years 73

Retiring More or Less Completely 73

Realising when age does – and doesn’t – matter 74

Working on past retirement age 74

Paying Attention to Your Pension 75

Claiming your tax-free lump sum 75

Buying an annuity to save tax 76

Making Much of Age-Related Allowances 77

Losing out due to the age-allowance trap 78

Escaping the tax trap 79

Chapter 7: Preparing for the Inevitable: Death and Taxes 81

Passing On Inheritance Tax: Figuring the Final Take 82

What’s added in 82

What doesn’t count 82

How the taxable total is figured 84

Spending Your Way Out of IHT 85

Looking at life expectancy 85

Making sure you have a home .87

Giving Your Way Out of IHT 87

Avoiding dubious deals 88

Reducing your estate as you grow older 89

Sharing with your spouse .91

Giving money with potential .92

Turning Capital into an Income 93

Drawing Up a Sensible Will 94

Setting up trusts 95

Making specific bequests 95

Rewriting a will 96

Part III: You Work Therefore You’re Taxed 97

Chapter 8: Working for Someone Else 99

Delving into the Mysteries of PAYE and its Codes 99

Finding out what the numbers mean .100

Looking at the letters 101

Table of Contents xi

Checking your pay packet 103

Meeting your national insurance obligations 104

Noticing when your employer gets it wrong 106

Considering Special Jobs and Special Situations 107

PAYEing people in special jobs 107

PAYEing when you’re on a contract or a casual worker 108

Losing or Leaving Your Job .108

Making the most of the magic number 109

Heading off to temporary retirement 110

Welcoming a golden hello 111

Chapter 9: Paying on the Perks 113

Taxing Those Little Extras 113

Travelling To and For Work 115

Counting the cost of a company car 115

Driving a van can save tax 118

Cycling – two wheels are better 119

Getting to work the green way 121

Getting Non-Transport Perks 122

Housing: From the vicarage to the lighthouse 122

Paying for childcare .122

Realising other tax-free perks .123

Explaining Expenses: The Wholly, Exclusively, and Necessarily Rule 126

Examining expenses that qualify 126

Eyeing expenses you pay tax on 127

Special deals for special jobs .127

Chapter 10: Sharing in Your Firm’s Fortunes 129

Offering Share Schemes – Who and How 129

Working out who offers what to whom 130

Treasuring the tax savings 130

Listing the types of schemes 131

Saving with a Save As You Earn Scheme 132

Looking at how SAYE accounts grow your money 133

Feeling safe with SAYE 134

Cashing in 134

Leaving before your shares’ time 135

Discussing Share Incentive Plans 135

Getting something for nothing with free shares .136

Going into partnership with your employer 137

Matching shares with employer generosity 138

Divvying up the dividends 138

Going Beyond Approval .138

Getting a reward for enterprise .139

Picking out particular employees with a CSOP 139

Chapter 11: Working for Yourself Can Be Less Taxing 141

Defining the Terms 141

Meeting HMRC’s standards for self-employment 142

Delving into the grey area: Sole trader or simple seller? 143

Testing your wings whilst staying employed 144

Formalising Your Status 144

Registering your new business 144

Choosing your tax year carefully 145

Signing on for and paying VAT 147

Keeping Accounts to Keep Everyone Happy 150

Filling out Schedule D can pay dividends 150

Counting your credits 151

Accounting for big business items 152

Claiming extra help as you start up 153

Accounting for loss making .154

Scanning National Insurance .155

Complicating the classes 155

Putting a cap on national insurance 156

Hiring Helpers 157

Employing your family 157

Establishing a partnership with your partner 158

Paying employees 159

Giving Up Work 159

Chapter 12: Considering Your Company’s Status 161

Informing Yourself about Incorporating .162

Looking at reasons to reject the company route 162

Taking advantage of company status 163

Setting Up a Limited Company 164

Steering clear of the big tax clampdown 165

Making use of family to lessen the tax bite 166

Deciding How Best to Pay Yourself 167

Paying yourself a salary out of the profits 168

Taking dividends versus taking salary 169

How it all works 169

Setting Up Special Pension Plans 172

Starting your very own company scheme 173

Looking at limits on how much you can pay in 173

Selling Up and Tax Rules 175

Table of Contents xiii

Part IV: Save on Your Savings

and Investments 177

Chapter 13: Minimising Tax on Your Savings 179

Taxing Interest 180

Paying tax without effort (or intent) 180

Shelling out at the special savings rate 181

Doing the sums yourself 181

Asking for a Tax Rebate 186

Checking your rebate qualifications 187

Recovering money with form R85 188

Getting money back with R40 189

Getting money back up to five years later .190

Caring for Children’s Bank Accounts 190

Considering the source 191

Noticing when R85 stops .192

Opting for Tax-Free Savings 193

Considering tax-free savings plans 193

Betting on premium bonds 194

Chapter 14: Taxing Investments 195

Considering a Trio of Taxes 196

Doling out Stamp Duty 196

Declaring your dividends 197

Dealing with Capital Gains Tax .199

Looking at the Tax Implications of Investing 203

Saving hassle with unit and investment trusts 203

Buying bonds 204

Examining the benefits of ISAs 205

Rewarding risk takers 206

Taking account of losses 209

Chapter 15: Saving Tax with Bricks and Mortar 211

Paying Stamp Duty and Council Taxes 212

Stamping on Stamp Duty .212

Contributing Council Tax 214

Buying to Let .214

Looking at the tax issues 215

Claiming interest against your buy-to-let income 216

Renting Rooms and Saving Tax 218

Taking on holiday homes 218

Moving into big-time property ownership 220

Selling Up and Passing Along 221

Telling the tax inspector about selling your home 222

Avoiding Capital Gains Tax – usually 223

Being subject to Inheritance Tax 224

Chapter 16: Understanding Life Insurance and Tax 227

Looking at the Basics of Insurance 228

Buying pure protection 229

Writing policies in trust 230

Evaluating Endowments 231

Saving through an Insurance Policy 232

Cutting Away the Complexity of Life Insurance Taxation Rules .232

Checking out whether policies qualify or not 233

Jumping tax hurdles .234

Looking at Lump-Sum Insurance Bonds 235

Taking a regular income 236

Slicing from the top .238

Eyeing Guaranteed Bonds 240

Going Offshore with Your Money 240

Looking at the legalities 240

Weighing up costs versus savings 241

Chapter 17: Depending on Pensions for Your Retirement 243

Looking at Pension Particulars 244

Saving for a Pension at Work 246

Calculating how much you can pay in 246

Looking at topping up and matching payments 247

Discovering the Benefits of a Stakeholder Plan 248

Buying a pension for your baby 249

Getting life cover 249

Building Up a Pension When You Work for Yourself .250

Earning Less But Saving More 250

Deciding What Happens When You Retire 251

Living it up with a tax-free lump sum 252

Paying in today, collecting tomorrow 254

What else can you do with your pension pot? 254

Smaller funds – bigger cash sums 255

Table of Contents xv

Part V: Self Assessment and Getting Help 257

Chapter 18: Filling In and Filing Your Self Assessment Form 259

Managing the Mechanics of the Form 260

Getting the forms 260

Discovering you don’t have to fill in a form 262

Keeping records 263

Filling In the Return .263

Avoiding the most common self assessment errors 263

Listing income and credits .264

Going into savings and investments 265

Making friends with the blank page 267

Seeing about supplementary pages 267

Counting the Ways of Doing the Sums 270

Finding out that the early form-filler works less 270

Using purpose-built software .271

Filing Your Form 271

Posting in your form 272

Submitting your form online 272

Paying on Account 273

Asking for a reduction in payments 273

Adding up the potential penalties .274

Chapter 19: Paying for Outside Help with Your Tax Affairs 275

Surveying the Services 276

Deducting the cost of advice 277

Assigning responsibility 277

Trying a Tax Form Checker 278

Affording the fees 278

Helping to recover overpaid taxes 279

Working Out the Value of Accountancy Services 279

Trying Out a Financial Adviser 280

Taking Cover against HMRC Action .281

Considering the costs .281

Avoiding voiding your policy 282

Saving Fees with HMRC’s Helplines 282

Getting practical advice 283

Keeping your expectations realistic 283

Chapter 20: Dealing with an Investigation 285

Explaining the Basics of Investigations 286

Misleading the taxman inadvertently .286

Rectifying your tax errors 287

Setting off warning bells .287

Ringing alarm bells when you’re self-employed 288

Placing time limits on the Inland Revenue 289

Being the Subject of Investigation 289

Getting a Dear Tax-payer letter 290

Exchanging information 291

Ending the investigation .292

Dealing with the Aftermath or Continuing the Process 293

Putting your accountant on notice 294

Climbing the HMRC complaints ladder 294

Asking for compensation .295

Part VI: The Part of Tens 297

Chapter 21: Ten Top Tax-Saving Tips 299

Helping Your Favourite Charity 299

Paying Attention to the End of Tax Year 301

Making Gifts When You Can 301

Using Capital Gains Tax Exemptions 301

Checking Pension Possibilities 302

Driving a Company Car 302

Claiming Family Friendly Credits 302

Double-Checking Your National Insurance Contributions 303

Ensuring You’re Not Caught in the Age-Allowance Trap 303

Claiming Tax Back on Savings 303

Chapter 22: Ten Top Tips for Dealing with the Tax Inspector 305

Getting Yourself Organised 305

Researching before Form-Filling .306

Remembering that Rules May Not Last Forever .307

Taking All Taxes into Account 307

Ensuring You Keep to the Timetable 308

Going Back to Previous Years 308

Steering Well Clear of Illegal Tax Dodges 308

Table of Contents xvii

Taking Professional Advice 309

Be Sure before Signing 309

Appendix: HMRC Helplines 311

Index 315

Introduction

How many times do you see the word tax in a day? Well,

I admit to not knowing how often it appears, but I’d betadding up all the mentions of this three-letter word in newspa-pers, on television, and on radio (and ignoring Internet hits),must come to hundreds or more every day

There’s another three-letter word ending in ‘x’ that’s alsowidely used in the media But whereas you can choose toignore sex, you have no option when it comes to tax Payingtax when it is due is compulsory Failing to do so brings arange of penalties from a simple fine to a long spell in prison

Paying Less Tax For Dummies is the only book in the Dummies

series that focuses on a legal obligation So it’s different.There are no ifs or buts Instead, there are plenty of must-dos

It is very difficult to avoid dealing with the Inland Revenue.When your grandparents or great-grandparents were young,only a minority paid tax Most people earned their weeklycash wage packet and that was that

Now practically no one escapes the tax inspector’s net Youstart paying income tax and national insurance at just over halfthe national minimum wage when you work full-time And if youare lower paid, or out of work, many state benefits are now part

of the tax collector’s job as well You can be a customer of thetax system as an employee, employer, self-employed worker,

a student with outstanding student loans, a parent, a parentwanting help with childcare, and as a consumer – because VAT

is now part of HMRC’s remit About the only tax not included

is Council Tax One way or another, around one-third of theaverage pay packet ends up in taxation with the Chancellor ofthe Exchequer and the Treasury

I’ve been writing about the tax system and how it impacts oneveryone from the richest to the least well off for over 20years During that time, much has changed in the tax world.One factor remains unaltered: We all need what the taxes payfor such as hospitals, schools, roads, and the police Yet, we

and ourselves.

I hope reading this book helps you square this circle by usingthe many legitimate ways available to reduce your tax billwhile paying what you owe on time

About This Book

Paying Less Tax For Dummies is designed to help you pay the

right amount for your situation It contains tax-saving tips andthen more tax-saving tips These are the carrots

But paying less tax is not just about considering ways toreduce your tax bill This book has two other strands to saveyou money In this book, I show you how the tax systemworks I tell you where you can find more information at nocost I give you hints and tips on how to deal with the InlandRevenue All this saves you hiring expensive professionalswho, in any case, take no responsibility for the tax formyou sign

And Paying Less Tax For Dummies can help you avoid the

sticks – the penalties, fines, and interest payments that theInland Revenue uses to enforce the rules So more carrots,and, it is to be hoped, no sticks

You can read this book in several ways Obviously, one way is

to start at the front cover and end up with the index pages.Reading it like a novel will give you a good idea of the widerange of tax-saving possibilities Or you can pick a topic thatinterests you and go there straight away

But my preferred way is to first read Part I on tax basics, andthen move on to the sections that interest you in your currentlifestyle Perhaps, after Part I, you decide to move straight on

to Part IV because savings and investments are really tant to you Then in Part IV, you might want to skip Chapter 16

impor-on life insurance as you’ve decided that, as a single persimpor-on,you have no dependants and so you don’t need any

Irrespective of how you approach reading this book, notethat it is designed to dip in as a reference So there will be

some repetition Doesn’t matter Some things cannot be

repeated often enough And as long as you end up paying lesstax, why worry?

Conventions Used in This Book

The taxation world revolves around jargon Initials, numbers,and combinations of initials and numbers are rife I’ve tried toavoid this as much as I can But you can’t dodge tax languagecompletely, and it does no harm to learn a few of the mostcommon terms Whenever I use tax-insider language, the firstmention in a chapter is italicised and I define the basics in an

easy to understand fashion

Most people have heard of the Inland Revenue However, theInland Revenue is now officially part of HM Revenue & Customs

(HMRC), so you’ll see the new name used in this book But asmost people still refer to HMRC as the Inland Revenue, I some-times use the old name, too (but they are the same)

You’ll notice text in grey boxes throughout the book Theinformation in these sidebars is deemed interesting but notessential So, you can choose to read a sidebar if the topicappeals to you, but if you skip it, you won’t miss out on any-thing you need to know

Foolish Assumptions

While writing this book I made some assumptions about you:

⻬ You are not a tax professional If you are, you have plenty

of manuals to choose from you, some taking up a fullbookshelf

⻬ You don’t need hand-holding through every dot and

comma of the annual income tax return I don’t go

through the self assessment form step-by-step Instead Ioffer tips you can put to use beforehand to make filling inthe form easier

⻬ You don’t want tax to dominate your life You want toknow just enough to make sure that you are paying theright amount and claiming what is due to you

Introduction 3

points where you have an option This applies larly to investment choices, and to lifestyle preferencessuch as being married or not, or whether to give assetsaway to your children and grandchildren.

particu-How This Book Is Organised

This book has six major parts, or themes Each part is

divided into chapters relating to the theme, and each chapter

is subdivided into individual sections relating to the chapter’stopic Additionally, to help you pinpoint a specific area ofinterest, there’s a Table of Contents at the start of this bookand a detailed Index at the end

Part I: Tax Basics

This part is essential for understanding the tax system in eral I take you through the Inland Revenue’s inner workings;give you a general understanding of how taxes impact on yourlife; scrutinise the process; and, most importantly for a subjectwhich relies on paperwork (and which can penalise you if youdon’t have it), show how to get organised and keep records

gen-Part II: Tax, You, and Your Family

In this part, I look at how tax affects each household I startwith some problematic personal issues including marriageand divorce I then continue with how tax can work both forthe very young and for those old enough to have retired And Iinclude what the tax inspector will do to what you leave toyour family and others after your death

Part III: You Work Therefore

You’re Taxed

This part concentrates on work It looks at what your bosscan legitimately deduct from your salary packet And it tellsyou how to check if the amount is correct

But it’s not all one way There’s a variety of perks you canhave This part will guide you through which are taxable andwhich are tax-free And this part will also tell you what hap-pens to you tax-wise if you decide to become your own bosseither through self-employment or setting up your own lim-ited company.

Part IV: Save on Your Savings

and Investments

In this part, I show you the wide variety of savings that can

be tax-free; and how to cut tax costs if you are prepared

to take risks, or prepared to take none Then, I look at what

is probably your biggest investment – your home And fromthere, it’s a short step to the increasingly popular buy-to-letmarket

This part also tells you about the tax nightmare life insurancecan be; and how you can retire more profitably by using allthe tax help on pensions that the Inland Revenue offers

Part V: Self Assessment

and Getting Help

If this book were a piece of music, this part would be the

crescendo These chapters deal with the essentials of formfilling which everyone has to at least think about once a yeareven if they don’t have to file a return It also looks at whetheryou should pay for additional help and what happens if youare unlucky enough to have to undergo a tax investigationinto your affairs

Part VI: The Part of Tens

This part is an essential ingredient in any For Dummies book.

Each of the two chapters contains ten succinct, must-knowpoints The first is a vital résumé of tax savings including how

to help a good cause with tax relief on any charitable donationyou make; the second Part of Tens is a rapid revision course

on how to deal with the Inland Revenue

Introduction 5

Icons Used in This Book

The little graphics in the margins point out bits of text to payspecial attention to for one reason or another

This icon points out instances where I put names and

amounts to explanatory text These examples can give you abetter understanding of how to put theory into practice, but ifyou have a grasp of the topic, you don’t need to read them Keeping in mind the tips that this icon highlights can makeyour tax life easier

Tax ins-and-outs are highlighted with this icon You can gainfrom reading the information, but if you skip it, you won’t missout on anything crucial

The advice marked by this bull’s eye is right on target forevery tax situation If you read nothing but these tips, you’ll

be well on your way to paying less tax

This icon marks things you absolutely shouldn’t do if youwant to stay on the good side of the Inland Revenue – or in agood tax position generally

Where to Go from Here

This book is set up so you read what concerns you in contained sections But of course, you can read in any wayyou wish It’s your call

self-Wherever you go from here, whenever you find a piece ofadvice or a warning that applies to you, copy it and then fix it

to the fridge with a magnet or pin it up on your notice board And as you read through this book, don’t forget to makepencil notes on your tax form when necessary Pencils soundvery low-tech But you’d be surprised how often tax profes-sionals really do use them You can always rub your markingsout and start again before you present a definitive, signedversion!

Part I

Tax Basics

“Ah – Mr Pinocchio, come in.”

Tneed, then this is where you’ll find it.

Here I tell you how the tax system really works; what youmust do to keep on the right side of HMRC; and how tomake your life easier (as well as avoiding hassles) by keep-ing records properly I also give you some backgroundfacts that may not be essential but which may help youunderstand better where the tax inspector’s coming from.There’s a lot of info here Consider this part the founda-tion of paying less tax, and a solid foundation on which tobuild later on

Chapter 1

Understanding the Process

and Your Role in It

In This Chapter

䊳Considering the basics

䊳Sizing up the Inland Revenue

䊳Giving an outline of the tax system

䊳Looking at taxes and your family

䊳Paying one way or another

䊳Making investments good for your tax health

The truth about taxes is that they pay for the services the

government provides such as education, the NationalHealth Service, and the police Lower taxes mean either thegovernment provides fewer services so you get less, or it has

to borrow money in order to provide the same services If itborrows, interest rates go up so your mortgage, credit card,and any other loans cost you more Simple, isn’t it!

The UK has one of the world’s most complex tax systems.But that bold statement only holds true for some people some

of the time Provided you earn around the average amountand don’t get income from a second home, investments over-seas, a spare job, an at-home business – or any of a number ofother sources – and aren’t concerned with what happens toyour money and assets after you die, you need never comeinto direct contact with HMRC Your employer, banks, orinvestment companies will often pay tax liabilities on yourbehalf

average, have much in the way of savings, have children, areretired, are saving up for a pension, run a business, makeprofits buying and selling things, have spare-time work, orhope to leave reasonable amounts to your family after youdie, then you have to interact with the tax system.

Even if you don’t currently need to have direct dealings withHMRC, the UK’s all-powerful tax organisation, you’ll need tounderstand the tax system sooner or later If you buy oneinvestment, or have a child, or get a workplace perk such asfree or subsidised private medical insurance cover, you have

a reason to interact with the Inland Revenue

And you may have to work out how various taxes interactwith each other This chapter gives an overview of how thetax system works

Filing Facts

Every January, the personal money pages of newspapers arefull of advice on getting your self assessment tax return in ontime It’s wise advice even if, as I know personally only toowell, it’s because a lot of the people who write these pageshave failed to give any serious thought to their own taxreturns and are feeling panicky and guilty and are fearful of afine for late filing (and wondering where they will find themoney for such a fine)

Only one in three tax-payers has to fill in a self assessmentform That’s around nine million people But millions morecan save tax or get a refund if only they bothered There arescores of perfectly legal tax-saving loopholes that anyone caneasily access without paying big accountancy fees HMRC willtell you about them if you ask But in most cases it will notvolunteer the information or send you letters begging you toclaim a refund

The Inland Revenue only wants what it is correctly owed Itgets on well with 99 per cent of tax-payers! It’s up to you tosave tax This book shows how you can get the best out of thesystem and pay the least, legally, into it

Distinguishing between

avoidance and evasion

Every year, lawyers and accountants argue out thousands oftax cases for their usually well-off clients Whatever the deci-sions in these cases, one tax law judgement is never far fromthe thoughts of the legal teams representing the Inland

Revenue and the tax-payer And that’s an old case from

70 years ago known as Inland Revenue Commissioners vs.

Duke of Westminster.

The judge in this 1936 vintage tax law case concluded: ‘Everyman (women rarely paid taxes in those days) is entitled if hecan, to order his affairs so the tax attaching under the appro-priate act is less than it otherwise would be.’

Translating out of legalese, this means you can take advantage

of every tax-break going You do not have to pay as much asthe government would like if you don’t have to, whether

you’re as rich as the Duke of Westminster was or just an age person

aver-Following the rules laid down in this judgement is called

avoiding tax Avoidance is totally legal What’s illegal, and

what can cause you to end up in one of Her Majesty’s less

choice establishments as an enforced guest of the tax-payer,

is evading tax Evasion is strictly illegal.

The differences are:

⻬ Avoidance is legal: Arranging your savings in such a way

that you do not draw interest or dividends until somefuture date when your tax rate falls is legal So too is

claiming the cost of a computer for use in your business

if you run your own company

⻬ Evasion is illegal: Putting your money into an offshore

tax haven and then denying you’ve stashed this cash orclaiming the cost of a computer that you use only to playgames or watch DVDs is certainly not legal

You can’t invent things to take advantage of legal

tax-avoidance methods

Chapter 1: Understanding the Process and Your Role in It 11

Putting the brakes on

avoidance schemes

Accountants made fortunes out of inventing legal but verycomplex tax-avoidance schemes that they then sold to richclients By the mid-1970s, this had got out of hand – or so theInland Revenue reckoned

So back to the courts, and, in a 1981 judgement called Ramsey

vs Inland Revenue Commissioners, the law said the Inland

Revenue can clamp down on artificial schemes designed tosave tax And it also held that tax dodges already in place, oralready used, can be ruled offside It meant the Inland Revenuecould look at what was really behind the tax-avoidanceschemes and not just at the legal issues on the surface.Two decades and more on, HMRC is still using this principle

to look at the reality of tax returns The basic test is wouldsomeone carry out a particular practice if there were no taxconsiderations If the answer is yes, then everything is fine.But if the scheme exists only to try to save on tax, then taxinspectors can challenge it (and they usually win)

Moving to One-Stop Tax

and Benefits Shopping

All taxes including national insurance, Stamp Duty, and ValueAdded Tax are administered by one of the very many depart-ments of HMRC Since 1997, Inland Revenue has taken overthe running of most benefits such as child tax credit (but notall at once)

This bringing together of all the taxes and benefits under oneroof is still in its early days There have been plenty of

teething troubles But the effect will be to abolish some of themore ridiculous parts of the system where one governmentdepartment was taking money from individuals that they hadbeen given by another part of the government Sometimes,this was even more than they had been given in the first place

so for every extra £1 they received, they paid more than £1back to the government

It should also make form filling less onerous as you should beable to glide effortlessly from one tax to a benefit and back to

a tax as your personal or family situation changes

This isn’t a New-Age tax guide But if it was, it would use theword ‘holistic’ to describe the new HMRC approach to taxesand benefits It’s only an approach, though There’s a lot oftime and lot of work that will be needed before the UK hasanything approaching a rational tax system with fully joined-

up thinking

Laying Out the Basics

of the Tax System

I bet you thought tax was tax! But there’s a huge variety ofways the state takes what it needs from the tax-payers whoprovide the wealth that pays for all those hospitals, schools,and roads So here’s a list of the taxes that can involve you as

an individual:

⻬ Income tax is levied on what you earn at work or the

profit you make if you are self-employed You also have

to pay it on the returns you make on savings Surprise:State benefits such as the basic retirement pension arecounted Income tax levels are currently at 0 per cent,

10 per cent, 20 per cent, 22 per cent, 32.5 per cent, and

40 per cent

⻬ National insurance is a tax on those who work and the

people they work for Both employee and employer have

to pay There are special rules for the self-employed

Surprise: You can pay national insurance even if you

don’t earn enough to pay income tax The rates are verycomplicated but most people pay 11 per cent across

most of their earnings from work (Chapter 8 explainsnational insurance in more detail.)

⻬ Capital Gains Tax is payable on the profit you make

when you sell certain assets such as shares and ties Surprise: There’s no tax to pay if you sell somethingwith an expected useful life of 50 or fewer years So you’dhave to pay on selling an Old Master but not on a piece

proper-of Britart that probably won’t last so long (try thinking

Chapter 1: Understanding the Process and Your Role in It 13

to 40 per cent of your profits to Capital Gains Tax (which

is addressed in more detail in Chapter 14)

⻬ Inheritance Tax is paid on what you leave behind when

you die Surprise: One great way of reducing the tax is tospend, spend, spend, while you are living There’s justone rate – 40 per cent – but Chapter 7 points out ways toreduce or avoid paying any

⻬ Corporation tax is a tax on company profits Surprise:

Companies can – sometimes – pay lower taxes thanhumans (See Chapter 12 for more on this.)

⻬ Value Added Tax (VAT) is added by most businesses

every time goods change hands or they go throughanother process The end result is a sales tax on manyitems and services you buy Surprise: Millions of poundswere spent on a legal case to decide whether a JaffaCake is a cake or a biscuit Cakes are tax-free, biscuitsare taxed The current VAT rate is 17.5 per cent andChapter 12 has more on VAT

⻬ Council Tax is paid on your residence whether you own

it, are buying it, or are renting it Surprise: Two can’t live

as cheaply as one as there are rebates if a property hasonly one adult occupant rather than two or more Whatyou pay depends on where you live and the value of yourproperty (Chapter 15 explains more.)

⻬ Stamp Duty is paid on most property transactions and

on most stock market deals Stamp duty ranges from oneper cent to five per cent depending on the value of theproperty Surprise: The tax does not go up evenly Sell ahouse for £499,999 and you pay £14,999.97 But if you get

£500,001 for the same property, the tax goes up to

£20,000.03 Turn to Chapter 15 for more information onStamp Duty

Considering Tax

and Your Family

Single people without dependants or partners have an easiertax life than most The rest of the population has to juggleroles as parents, grandparents, or children Many may have to

deal with their own parents and their own children at the

same time

Family tax-saving pointers to consider include:

⻬ Deciding whether to marry: Thanks to independent

tax-ation, women’s tax lives are no longer subordinate to

their husband’s tax concerns Crazy as it sounds, thereare still lots of occasions when married people can dobetter out of the tax system Civil partnerships give thesame tax status Try Chapter 4 for information on

whether to tie the financial knot or not

⻬ Passing assets between spouses: Swapping savings

accounts between the two of you can save a lot in tax.But do you trust each other that much? And what hap-pens if you divorce? Chapter 4 is better than a visit to amatrimonial guidance agency

⻬ Working out the best way for children to pay less tax

on savings accounts: It should be easy But it all depends

on where the money came from Turn to Chapter 5 forchildhood tax issues

⻬ Looking at employing partners and children in family

businesses: This is fine as long as the work’s real and the

rates you pay are sensible Chapters 11 and 12 have moredetails

⻬ Arranging the best way to take advantage of Capital

Gains Tax exemptions: Two can sell more cheaply than

one if you follow some simple rules Take a look at

Chapter 14

⻬ Taking advice on how to deal with the tax benefits of

pension payments: Simplification is on the way But for

the moment, you can be paying into five different sion tax types See Chapter 17 for much more

pen-⻬ Knowing how to deal with your pension when you take

it: There’s a basic choice for many which can mean paying

more or less tax for the same income It all comes down tohow you invest retirement cash, as Chapter 6 shows

⻬ Calculating tax bills in retirement: Just because you

stop work doesn’t mean your relationship with the InlandRevenue changes It can get more complicated Chapter 6can help simplify matters

Chapter 1: Understanding the Process and Your Role in It 15

taxes and death is correct: Items such as your home and

certain savings and investments that escape tax whileyou are alive will be caught for possibly even more taxafter you die Turn to Chapter 7 for tips

Looking at How You Pay

Most people pay income tax through the Pay As You Earn(PAYE) scheme through their employer This system makestax and national insurance deductions as painless as possible.The money goes straight out of your pay packet to the InlandRevenue without you ever seeing or touching it

If life was that simple, this book would be half the size Millions

of people on PAYE have to fill in self assessment forms as well.They might have perks from work such as company cars orhealthcare schemes, or they might have bigger than averagesavings or a spare-time job or even a profitable hobby Theyface an annual January and July tax bill as well

If you work for yourself, you have to fill in an annual selfassessment tax form You then pay the income tax and

national insurance due in two annual installments So youhave to be sure to keep some cash around in a bank account

to meet these bills

Failing to pay your tax on time brings automatic penalties.And, you’re fined the same £100 automatic penalty if you are

a day late filing a return on which you owe £1,000, or a weeklate owing £1 million!

automatically by the bank or building society And they want

to help you claim tax credits Tax inspectors can really be

quite generous! But you have to know what to ask for to getthe best out of the system There’s plenty in Chapter 13 onhow to save more of your savings

Investing for tax savings

Almost every different type of investment has its own tax

rules Non-tax-payers can reclaim some tax deductions but notothers High-earning top-rate tax-payers can do well with thetaxation of some investments but others are a waste of space

So it’s no wonder there’s a whole section of Paying Less Tax For Dummies devoted to savings and investments (Part IV).

Some investments that save tax are really very risky Alwaysask yourself if you would want to buy into these if there was

no tax savings Unless you are sure, avoid them Tax deals oninvestments are never government guarantees of success!

Treating your home

as your tax castle

Your home, if you are buying or have bought it, is probablyyour biggest single financial asset There are ways of

using your own home to save tax and to give you a tax-freeincome But there are also ways to invest in property that

can save you tax Chapter 15 gives you more details

Chapter 1: Understanding the Process and Your Role in It 17

Chapter 2

Looking at the Players and the Process

In This Chapter

䊳Understanding HMRC’s powers and scope

䊳Knowing about its structures

䊳Aligning your responsibilities with your rights

䊳Working through the essential dates each year

䊳Finding out where to get help

Getting to grips with HMRC’s powers and how it works

will not reduce your tax bill Sorry And this chapterdoes not have any tips you can put into immediate action.Sorry, again

But this chapter can help keep more money in your pocket.How? By letting you know about the tax collection process,which can help you make fewer mistakes Errors can becostly, especially if you lose out on rebates, benefits, or cred-its, and certain errors can be potentially ruinous if you are hit

by penalties, fines, and bankruptcy as a result of

mis-managing your tax affairs

And discovering more about what makes HMRC tick gives youmore clout in dealing with your accountant, if you use one Theaccountant will realise that you’re not a novice or a completeclot and treat you better The accountant may even realise youmight query your accountancy bill if it’s outrageous

This chapter gives you the information you need to stand the tax process and your place in it

under-Understanding the Inland

Revenue’s Role

When income tax was first introduced in the UK in 1799, it was

as a temporary measure to pay for one of Britain’s seeminglyeternal wars against France In 1802, income tax was repealedbut it didn’t disappear for long In 1803, income tax was re-introduced after a sadly brief period of abolition In thosedays, it was thought wrong for any government department orcivil servant to have complete details of anyone’s financialaffairs All that has changed These days HMRC is a cradle-to-after-the-grave service

If you think the renamed Inland Revenue is just about ing income tax from the nation’s better-off folk, you’re a bitbehind the times The Inland Revenue absorbed the manage-ment of the grandly named Her Majesty’s Customs and Excise

collect-to become HMRC, and now goes well beyond traditional taxes,embracing just about every financial dealing you may havewith the government or any government agency HMRC collectsevery tax around (except Council Tax) and is increasinglyresponsible for handing out benefits

Virtually all your dealings with HMRC revolve around yournational insurance number You get this number when youturn 16 whether or not you are in work or pay any tax Thisnumber never changes throughout your life no matter howoften you change your address or your name It is your uniqueidentifier as a UK citizen and only a few very elderly peoplewho did not work after 1948 don’t have one But you don’thave to be a citizen to have a number Those working herewith work permits have to have one as well

Administering and collecting

HMRC’s responsibilities include:

⻬ Collecting taxes, including income, capital gains, andinheritance tax as well as stamp duty, value added tax,and corporation tax on companies

⻬ Administering national insurance HMRC collects themoney in, although the main benefit, the state retirement

pension, is paid out by the Department for Work and

Pensions

⻬ Collecting customs duties

⻬ Dispensing benefits and credits, including the child fit and child tax credit and the Working Tax Credit

bene-⻬ Policing the National Minimum Wage and investigatingemployers who try to pay below the level

⻬ Collecting the interest and repayments on loans to dents from the government’s Student Loans Company

stu-⻬ Overseeing the work and spending of business support

teams – local organisations set up to encourage new and

small businesses

⻬ Valuing land for council tax and other purposes

Imposing penalties

Around one million people each year have to pay extra money

to HMRC for making mistakes or not getting forms in on time.Only a tiny proportion of these are deliberate tax cheats Therest either can’t be bothered with their tax returns or havetheir affairs in a total mess or cut corners

Chapter 2: Looking at the Players and the Process 21

One-stop shopping or total intrusion?

Depending on your point-of-view, the

way the Inland Revenue has emerged

at the top of the pile in collecting all

the various amounts we have to pay

to the government (and in returning

some of that money in the shape of

benefits and tax credits) is either a

move towards convenient one-stop

shopping or a further incursion by an

all-powerful state into our personal

affairs

In fact, it’s neither so far You still have

to shop at various outlets to pay

all the taxation you owe For the

moment, the takeover by the InlandRevenue of Customs and Excise hashad little visible effect on those whoask you whether you have anything

to declare on a return from a visitabroad Nor will your income taxinspector know if you have beenfined for illegally importing tobacco

or alcohol But eventually their puters will interlink at the front-linelevel There’s a surprisingly largeamount of correlation between thosewho cheat the customs and thosewho cheat the taxman