Six ways you could reduce the amount you pay in Income Tax and National Insurance

Rishi Sunak may have to break income tax promise says expert

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Only 48 percent of people say they know how much tax they pay, but even then, huge confusion around taxes means many will be way off the mark.  Women, the squeezed middle (aged 35-54) and renters are the least likely to know what they’re paying in tax, Hargreaves Lansdown found.

Worryingly, the less people earn, the less likely they are to be aware of what they’re paying in tax.

Sarah Coles, a personal finance analyst at Hargreaves Lansdown, has explained how people can reduce their income tax and National Insurance bills.

Ms Coles warned savers could be caught out further in the coming months as HMRC aims to balance the books following the pandemic.

“Most of us don’t know how much tax we pay, so we risk paying over the odds,” she said.

“And at a time when the Government is keen to claw back as much money as possible to meet the astonishing costs of the pandemic, if we don’t get on top of our tax bill, there’s every chance we’ll be caught out by tax hikes too.

“It’s hardly surprising we don’t know exactly how much tax we’re paying, because the tax system is so needlessly complex. However, being completely in the dark about tax is dangerous, because we may not budget effectively for tax bills, and we run the risk of paying more than our fair share.”

Ms Coles went on to explain how the complicated tax system is largely to blame for keeping confused.

“The tax system almost seems to have been designed to bamboozle,” she said.

“Take VAT, for example, essential foods are VAT-free, and luxuries face VAT, but it’s almost impossible to guess where the line is drawn. So, for example, potato crisps are taxed at 20 percent, but there’s no VAT on vegetable crisps, and tortilla chips are zero rated too.

“And even when we think we know how much tax we’re paying, there’s a good chance we’re actually in the dark. Take income tax: even if you know the top rate of tax you pay, it isn’t the same as knowing how much tax you pay overall, because you face a different rate on each slice of your income. Basic rate taxpayers have a marginal rate of 20 percent, for example, but pay an average of 9.5 percent in income tax across all their income.”

Fortunately, Ms Cole broke down how people can “get to grips” with the taxes they pay, specifically what’s levied on income and National Insurance.

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Income Tax and National Insurance

Analysing what is paid on income will differ between those who are employed and freelancers. Those who are employed can easily find out what they’re paying in tax by checking their payslips.

This will allow them to see how much goes in Income Tax and National Insurance. Self-employed workers will be able to check on their tax bills retrospectively through a tax return.

However, Ms Coles warned it can be more difficult to monitor tax costs as one goes along for self-employed workers and as such, syphoning off a proportion of everything that is earned and putting it in a separate account to cover the cost of the taxes would be beneficial.

On cutting a tax bill, Ms Coles said: “If you’re employed, you can lower your salary through salary sacrifice. You and your employer agree to cut your salary and pay the equivalent into benefits which have tax and National Insurance breaks. It means you save tax and NI on the portion of your salary that you sacrificed in return for these benefits.”

She highlighted six ways one could reduce the amount of tax they pay via salary sacrifice.

“The best-known example is the pension, but it also applies to the cost of pension advice provided by your employer, childcare vouchers (now only available to those who already receive them), workplace nurseries, cycle-to-work schemes, and ultra-low emission vehicles, which emit 75g of CO2 per km or less.

“You can also make charity donations and if you’re a higher rate taxpayer you can claim back the additional tax relief through self-assessment.

“If you’re self-employed, make sure you claim for everything you’re entitled to, which will bring your tax bill down, including all allowable expenses, pension contributions and charity donations.”

Workers will likely want to heed this guidance as recent data from HMRC highlighted just how costly taxes are becoming for Britons.

Between April and August 2021, total HMRC receipts hit £280.4billion, a £84.7billion increase on the same period a year before.

The same data showed cash receipts were higher from VAT by £46.7billion.

Cash receipts were higher from Income Tax, Capital Gains Tax & National Insurance Contributions (NICs) (£25.2billion), Corporation Tax (£4.3billion), Hydrocarbon Oils (£3billion) and Stamp Taxes (£2.6billion).

Autumn Budget

On October 27, Chancellor of the Exchequer Rishi Sunak will deliver his next Budget and many expect sweeping tax changes to cover the costs of coronavirus. Predictions have been made that everything from pension tax relief to Capital Gains Tax could be targeted.

Tom Evennett, EY’s Head of Private Client Services, warned a redistribution of wealth from “the few to the many” will be prioritised by the Government and capital gains tax (CGT) and inheritance tax (IHT) could be “ripe for reform”.

“These appear to be attractive targets as the revenues both currently raise are dwarfed in comparison to amounts generated from income tax, National Insurance and VAT,” he said.

“Even without changes, future tax receipts may be higher, particularly given inflated property and asset values and the anticipated transfer of significant wealth to younger generations in the coming years.

“Increasing headline rates or limiting reliefs for either of these two taxes may not be popular with the Government’s traditional core voters and many would see rate rises, or the curtailing of reliefs, as a brave move given the responses to the Health and Social Care Levy.”

While any tax plans have yet to be announced, HM Treasury confirmed the upcoming Budget and Spending Review will “set out the plan for how public spending will deliver the people’s priorities over the next three years.” contacted HMRC for comment

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