A Labour MP once famously said, that the difference between tax avoidance and tax evasion, is just the thickness of a prison wall. In other words, morally wrong … in his opinion.
Wealthy individuals and the not so wealthy have for years used legitimate ways to pay less tax, so say’s the treasury and is currently well reported in the media.
Tax avoidance – unlike tax evasion – is perfectly legal.
So, what are the most common forms of tax avoidance?
Tax relief
Individuals who have high incomes – Spare income can be invested to reduce the amount of tax paid. For example, this income can be invested into an individual’s pension scheme, up to a certain limit,
Or into schemes that invested in start up businesses that may have great potential. These are Enterprise Investment Schemes (EIS) encourage individuals to invest into new businesses, however by their very nature they are risky investments. These schemes have a limit on how much can be invested and get tax relief on.
It is also possible to insure your own life, and write the policy into a trust for your children or grandchildren. The money passes to them without paying inheritance tax. This is a useful strategy if you wish to plan for an Inheritance tax liability.
Employing a husband or wife
This is an entirely legitimate way to reduce the overall family tax liability, if you have your own business. Some business owners employ their husbands or wives, who paid little or no tax previously. They might do very little work, but are still paid a salary. This means that your overall income tax bill could be reduced. The benefit from doing this is because you will most likely have a personal allowance to set against your income. If you are earning more than £100,000, you will lose some or all of your personal allowance.
If all your household income was earned by one person, this may put you into a higher tax bracket. As a couple you may also be able to pay less tax by sharing ownership of the company and paying yourself a dividend, rather than salary.
Artificial losses
A business can be creative with their accounts and can legitimately make unnecessary transactions to create an artificial loss. These appear to be losses on paper, which can then be offset against income for tax purposes. They do not actually result in a loss in cash terms, however it does allow the business and its owner to benefit from a lower tax bill than would otherwise be the case.
As the Treasury is currently very short of money, changes could be introduced at any time under the General Anti-Avoidance Rule (GAAR). This could remove the opportunity to arrange your affairs in the best possible way to reduce your tax liability legitimately.
