8 Things You Never Knew About Tax Planning
What is tax planning?
If you think you are paying too much tax and would like to reduce your tax bills, you can legally do so.
Tax rules can be confusing and complex, but if you understand them and use them to your advantage, you can reduce the amount of tax you pay. The tax system is filled with government-provided reliefs, exemptions, and deductions that can be utilised appropriately to reduce your tax liabilities. As a result, you can save a significant amount of money every financial year.
This is known as tax planning.
Tax planning is the legal process of analysing and organising your financial position to reduce your tax bill and maximise tax advantages. It enables you to make the most of the government’s tax allowances, deductions, and benefits. It allows tax savings while adhering to all legal obligations and regulations.
To make tax planning strategies to reduce your tax liabilities, you can contact professional tax accountants or tax advisors.
Tax planning facts you probably had no idea about:-
One of the most crucial aspects of financial planning is understanding what tax planning is. It is a method of analysing one’s financial condition from a tax efficiency point of view to invest and utilise resources as efficiently as possible.
An effective tax planning strategy should include various savings alternatives, financial products, and retirement plans that can maximise tax breaks and allowances while minimising the amount of money spent on taxes and fees. Thus, it’s critical to understand tax planning to devise strategies before making your next financial move.
Here are a few facts you probably didn’t know about tax planning that can help you save money:-
- Personal Savings Allowance
Since April 6, 2016, all basic rate taxpayers have been entitled to a £1000 Personal Savings Allowance (PSA). The Personal Savings Allowance means you won’t have to pay tax on your savings interest, and banks and building societies won’t deduct tax from your account interest. This means you will be able to gain up to £1,000 in tax-free savings.
If you are a higher rate taxpayer, then you can earn up to £500 through PSA.
- HMRC tax code
Every year, you should check your HMRC tax code to ensure that you have paid the correct amount of tax. Your tax code tells your employer how much of your pay is tax-free, and the remainder is subject to tax.
When your tax office sends you a notice explaining how the code was calculated, double-check whether you have been given the appropriate allowances and that the amount of pension or other income displayed is correct or not. If you’re on the wrong tax code, you can get a refund for previous years and pay less tax in the months ahead.
- Renting out a room
You can make an extra £7,500 tax-free by renting out a room in your home. However, there are certain limitations. You can rent out only rooms in your house. It does not apply to homes that have been transformed into independent flats.
- Blind Person’s Allowance
If you are registered blind or severely sight-impaired and can not do any work that requires eyesight, you get an additional allowance of £2,390. After registering as a blind person with your local authority, you can ask for Blind Person’s Allowance from HMRC, as it is not added on its own.
- Marriage Allowance
If you or your partner was born after April 6, 1935, you may be eligible for Marriage Allowance, depending on your income. If your or your partner’s earnings are less than the personal allowance, the lower-earning partner can transfer their unclaimed personal allowance to the higher-earning partner.
You can also save money on taxes by transferring investments to your partner, who pays a lower tax rate. However, the investments must be genuine gifts, not just gifts in the name.
- Claiming back overpaid taxes
If any of the following situations apply to you, you can usually claim tax back within four years of the end of the tax year:-
- Excessive tax has been deducted from your income.
- You have overpaid taxes because you failed to claim tax relief or allowance.
- Change in working hours
If your working hours change, you must notify HMRC to get your tax code adjusted and receive the correct code. If you have a job and a pension, you must be careful since each source of income is assigned a code. Being cautious will prevent you from paying the incorrect tax amount and getting charged with penalties.
- Pension contributions
Pension contributions benefit both employees and employers because they are tax-deductible. Contributions to an employee’s pension are tax-free for the company. They will also be exempt from income tax and national insurance for the employee to a limited extent.
To get tax relief, you can make pension contributions through many methods, like Self-Invested Personal Pensions (SIPP) and Small Self-Administered Pension Schemes (SSAS). When choosing a pension provider, small business owners should consider what is best for them and their firm.
Sophia is a full-time financial writer at experlu. she is a passionate blogger and love to share her knowledge on various subject. Content created by Experlu– are loved, shared & can be found all over the internet on high authority platforms.