Limited Company vs. Self-Employed

Tax Saving Tips

1. KNOW YOUR ALLOWANCES

Your personal allowance shows how much income You can receive from earnings, pensions and savings before paying tax. For the latest tables, please visit Tax Table section of the website.

From April 2010 a new rate of Income Tax of 50% applies to income over £150,000.

The Income Tax Personal Allowance will be reduced for those with incomes over £100,000, tapering down to zero.

If You have earned less than Your allowance in a tax year and been taxed, then You can claim a rebate.

2. DECODE YOUR TAX CODE

We overpay millions of pounds in tax each year and much of this is because taxpayers are given the wrong tax code. So check that Your coding notice makes sense and You have been put in the right category. To calculate Your code, HMRC deducts the value of Your benefits from Your personal allowance.

Benefits include such things as a company car and private medical insurance. Pensioners' coding notices will show a deduction for the state pension because it counts as taxable income, even though it is paid without tax being deducted. Those who receive the married couple's allowance will also see a deduction to take account of the fact that it is given only at the 10% rate.

Higher-rate taxpayers will have extra deductions to account for income such as savings interest and share dividends.

You'll also have a letter to signify what type of taxpayer You are:
L - You get the basic personal allowance.
P - You are 65 to 74 and get the full personal allowance.
Y - You are 75 or over and get the full personal allowance.
V - You are 65 to 74, eligible for the full personal allowance and the married couple's allowance and just pay basic rate tax.
K - You get no tax-free pay or owe money to HMRC.
T - HMRC needs further information, so cannot allocate another code.

3. AVOID SAVINGS TAX

Savings interest is taxed at 20% basic. If You or Your children are not taxpayers, then fill in an R85 form at Your bank or building society so Your interest can be paid tax-free. This will boost Your savings income at a stroke. If You only just breach Your personal allowance level (see above), then You should be paying savings tax only at 10%. Banks and building societies' systems cannot cope with this so You will have 20% deducted at source.

You can reclaim the extra tax every April by asking the Revenue for an R40 form.

4. USE YOUR OTHER HALF

If Your spouse has any unused tax allowances or pays tax at a lower rate, make use of this. Higher-rate taxpayers must declare savings interest and dividend income to HMRC and extra tax is deducted. But if a higher rate taxpayer gives their savings to their spouse then they would pay less tax, boosting the couple's income.

Of course, You must trust Your spouse. Don't hold the money in joint names because HMRC will assume You each earn half the interest.

5. SAVE ON YOUR SAVINGS

For the 2009/10 year You may invest £7,200 into Your ISA (or £10,200 for those over 50), and up to £3,600 (£5,100) of this can be invested in cash but if You wish You can invest the full amount into stocks and shares. The gains from which are tax free. However, from April 2010, everyone over 18 years of age is able to save up to £10,200 per annum, of which £5,100 can be in cash.

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