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No-one likes paying more income tax than they need to, so here are some quick tips on how the current rules work and how to avoid tax where possible:
- Most people pay no tax on the first £11,000 they earn, then 20% tax on earnings up to £43,000 and 40% tax above that.
- National insurance is effectively an extra 12% tax on most people’s income, meaning that combined with income tax the real tax rate that most people suffer is 32%.
- If you earn less than £16,000 per year in a job then up to £5,000 of savings income (from bank accounts etc.) is tax free.
- The first £1,000 of savings interest is tax free for any basic rate taxpayer (£500 for higher rate taxpayers) – this will make cash ISAs pointless for most people, so focus on getting the best rate possible whether the account is an ISA or not.
- By giving even a small share in an asset (such as a house) to your spouse or civil partner, they can declare half the income or rent that the asset generates as their income rather than yours, which could save you tax.
- If you earn more than £50,000 and either you or your partner claim child benefit, you will see some of this child benefit claimed back via a tax charge. Contributing to a pension can stop this happening.
- If you are a non-taxpayer then you can transfer some of your personal allowance to your spouse, if they are a basic rate taxpayer. That could save them more than £200 in tax.
- Anyone born before 6th April 1938 used to get a slightly higher personal allowance than younger people, but this will cease to be the case from 6th April 2016.
- If you earn more than £100,000 then you start to lose your personal allowance. By the time you earn a bit over £120,000 you have lost it all. The effective tax rate between £100k and £120k is therefore 60%. Contributing to a pension can stop this happening.
- You can receive up to £4,250 in rent from a lodger without paying tax, and this allowance rises sharply from April 2016.
- If you put money into a savings account for your child, and the interest is more than £100, you will pay tax on that income yourself (unless you use a Junior ISA or Child Trust Fund).
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