A question we are often asked is, how can I reduce my tax bill?
A simple question on the face of it, but how simple is the UK tax system?
An income taxpayer might reasonably assume that there are only three rates of tax within the UK, basic rate tax at 20%, higher rate tax at 40% and the additional rate at 45%, and they would technically be correct. However the reality of the UK tax system is that your personal circumstances could mean that you are potentially paying a far higher figure than the additional tax rate of 45%.
These circumstances arise due to tax benefits and allowances that have been introduced by governments over the years, have later been withdrawn or partially withdraw either through means testing or with a staggered withdrawal once exceeding a threshold.
The institute of fiscal studies has produced a graph showing how tax rates would change on a married typical taxpayer with two children.
Click picture to enlarge
From the graph in this relatively common scenario depending on the taxpayers income there could be twelve marginal tax rates!
Tax planning therefore is crucial for the taxpayer to understand what rate of tax is payable, but also tax planning should be undertaken by all taxpayers to ensure they understand what measures could be undertaken to mitigate the highest rates of tax by arranging their affairs differently.
An example would be the new married couples allowance, which is worth £210 per couple. The taxpayer earns up to £42385, the basic rate tax limit, but if he earned £1 above that the allowance is lost, that £1 of additional income has cost the taxpayer £210! An extreme example but one that highlights the requirement for tax planning.
We at Morgan Hemp would be happy to discuss tax planning opportunities for taxpayers, feel free to contact any of our directors on 01792466428 who will be only too happy to assist