With inflation rising and no one feeling exactly flush with money at the moment, keeping what’s rightfully yours by paying less tax is pretty near the top of most people’s financial priorities’ list.
You probably know some of the more ‘typical’ ways to maximise your tax allowances and reliefs, but what about these four less well-known ways?
1. Claiming back tax relief for subscriptions and professional fees
To claim back subscription and professional fees, you must pay them monthly or annually. Fees paid based on a lifetime membership do not attract tax relief. You cannot include registration fees either.
Examples of doctors’ and dentists’ fees that do qualify for tax relief include:
- GMC subscriptions
- Membership fees to other professional bodies such as the BMA
- The cost of, for example, MDU and MPS subscriptions or other mandatory insurance and retention fees to your approved professional body.
You can go back several years to get tax relief so, if you think you haven’t claimed for everything you are entitled to, don’t miss out! This could be over £700 if you haven’t claimed previous years.
2. Funding your children through further education
Is there an alternative to constantly giving the kids regular hand-outs at University?! If funds allow, you could invest capital in your child’s name at the beginning of their studies. Any income gained from this investment would then be taxed at your child’s marginal rate, not yours.
If there was any capital gains tax (CGT) to pay, you would also benefit from using your child’s CGT exemption which is currently £11,300. Yes, even a child has a CGT allowance!
The downside is that control of your capital will be passed to your child. There is also an associated investment risk that all parties will need to be comfortable with.
Even so, giving your student children assets instead of a monthly allowance paid from your taxed income could be a financially attractive option for many doctors and dentists. If nothing else, assets are less easy to fritter away!
3. Reducing your inheritance tax rate from 40% to 36%
The Inheritance Tax (IHT) threshold for 2017/2018 is £325,000 per person. This is the amount up to which your estate has no inheritance tax to pay and is called your nil-rate band.
Since April 2017, everybody also has a family home allowance called a residence nil-rate band (RNRB). Because the rules and regulations surrounding RNRB are very complex, we do strongly recommend that you take professional advice to calculate what your residence nil-rate allowance actually is and, ultimately, your total IHT allowance.
Whatever your IHT plus residence nil-rate allowance is, if the value of your estate exceeds this figure when you die, your family are likely to have to pay inheritance tax on the excess amount.
The current rate of inheritance tax is typically 40%, but there is a way that you can reduce this to 36%.
If you leave 10% or more of your net estate to a qualifying charity/ies, the tax due may be paid at a reduced rate of 36% (form IHT430 is required). In order to qualify, the charity (or community amateur sports club) must be an HMRC-recognised charity for tax purposes.
The 10% must be of the net value of your estate i.e. the value of all your assets after deducting any liabilities, qualifying reliefs or exemptions and, of course, your total IHT allowance.
It gets better! The beneficiaries of your estate can even arrange to pay the 10% donation after your death (referred to as an ‘Instrument of Variation’).
Dr Thomas died on the 12th August 2017 with an estate worth £600,000 after liabilities. He has the standard £325,000 IHT nil-rate band and is able to claim the family home allowance of £100,000*. His total IHT allowance is therefore £425,000.
This leaves £175,000 liable to inheritance tax (known as the net value).
However, in his Will, Dr Thomas left a donation of £50,000 to Cancer Research. This reduces the value of his estate liable to IHT to £125,000.
Because Dr Thomas left more than £17,500 (10% of the net value of his estate) to charity, the inheritance tax due on the £125,000 will only be £45,000 (36% x £125,000) instead of £50,000 (40% x £125,000).
* The family home allowance will increase each year up to 2020/21. The maximum allowance will be £175,000. This can be reduced for larger estates.
4. Donating to charity
If you’re a UK taxpayer, when you make a charitable donation you can also make a Gift Aid donation.
OK so you already knew that but, did you know that if you’re a higher rate tax payer paying 40% or 45% tax, you can claim the difference back between the basic rate (20%) and your higher rate through your tax return or, by completing a P810 form that will adjust your tax code.
The same applies if you sponsor a friend for a charitable cause.
You make a donation of £100 to charity. The charity then claims Gift Aid at 20% which makes your donation a total of £125. If you pay tax at 45%, you then claim back an additional 25% through your tax return (45% minus 20%). £125 x 25% = £31.25 tax rebate.
You can also elect to have made the donation in the previous tax year which, in some cases, can work out more tax advantageous. And don’t forget, your annual membership fee for the National Trust, as well as the entrance fees to most zoos, is treated as a charitable donation for which you can qualify for tax relief.
Needless to say, tax planning is neither quick nor simple and this article is not to be deemed as a recommendation to anyone reading it!
The tax reliefs referred to are those currently applying in the UK to UK tax residents. Not only are the reliefs liable to change, the value of your tax reliefs will depend on your individual circumstances. You should seek professional advice before you proceed with any course of action.
How many of these lesser-known ways to save tax did you already know of? Let us know by adding a comment below