Reducing Ever Increasing Taxes

Income Tax continues to increase for ever onward and upwards and due to the effect of fiscal drag the tax burden in real terms keeps increasing.

Fiscal drag arises because personal allowances and tax thresholds have not increased at the same rate as wages and pay has increased.

In simple terms this means that a higher percentage of tax is collected from the same take home pay packet. The effect of fiscal drag can simply be illustrated by looking at the actual figures for tax collected and they show that that in 1997/98 income tax for paye amounted to £67,041 million was collected by HMRC (Her Majesty's Revenue and Customs) but in the year 2008/9 this had risen by over 90% to a staggering £128,752 million. During these years wages have increased at an average of 5% per annum but the taxes have increased at 8% per annum. So what can the ordinary business man do to reduce his income tax liability if he is self employed or what can he do to reduce his corporation tax liability in a Limited Company?

Of course you must be aware that tax avoidance is a legal means of reducing your tax bill but please remember that tax evasion is illegal and must be avoided otherwise you could get your self into serious trouble.

HMRC have ever increasing powers which are a very strong deterrent to ensure that one does not become involved in evasion. You can for example be sent to prison for evasion but not for avoidance.

There are many simple steps that one can take which are tax avoidance as opposed to evasion.

The simplest one but which is rarely dealt with properly is to keep a good set of books and records. Recording details of all the business expenses that you incur in your trade. If you do not then you will be paying tax for no proper reason. If you fail to keep proper records you may pay tax on profits that you have not made and this is how many high earners (some famous)have become insolvent.

Apart from the ability to get your taxes right by keeping excellent books and records they will also be very helpful should your business be selected for a tax enquiry as you will find it much easier to resolve with a good set of records.

Another important idea for the self employed is to keep a separate business bank account and deal with all you business payments and receipts via that bank account.

If you trade from home then you should consider making a charge for any additional costs that you may incur including telephone and light and heat if applicable.

If your wife or family work in your business have you paid them for their time incurred?

Have you considered making a contribution in to a pension plan for both tax savings but more importantly to fund your retirement? You may be able to make wage payments for your spouse and family.

If you have n employed on PAYE you may have been taxed at any time on an incorrect or perhaps an emergency code.If so you could ell be due an Income Tax refund.

Employees under paye may have incurred costs and expenses that they have not been reimbursed for such as perhaps mileage allowances or subsistence.Also if you use your car for yourself and you take another employee with you on a business trip there is a higher mileage allowance that you can claim.

Other expenses that employee may be able to claim for are laundry expenses for work clothes, work clothes them selves and indeed specific allowances for any tools or equipment that are used by the employee can be claimed for if they are needed to carry out their employment.

Another key tax planning point is to consider whether you should trade through a Limited company or as a sole trader there are advantages and disadvantages of either style and they need to be weighed up on the individual circumstances.


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The Author writes many articles on UK Income Tax Reclaims and Pension Planning and for more information please go to PAYE Refund