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12 April 2016
A guide to reducing an individual's tax liability.
The overriding aim of all personal tax planning is to legally reduce the amount of tax paid on an individual's income. This income can come from a number of sources and the tax reduction strategies available will be based on the reliefs and allowances applicable to each source.
For the 2016/17 tax year, most people's personal allowance is £11,000. The personal allowance is reduced by £1 for every £2 that adjusted net income exceeds £100,000, so the effective tax rate of income between £100,000 and £122,000 is 60%.
Many companies offer employee benefits which can provide tax advantages. When planning for income tax, these benefits should always be assessed and included in your calculations.
Tax relief on pension contributions, whether by an employee, an employer, or both should also be carefully considered and calculated when income tax planning.
Inheritance tax (IHT) is paid on a person's estate, property, money and possessions, if it is valued above the current threshold of £325,000. The current rate of IHT is 40%, unless 10% of an individual's estate is bequeathed to charity, in which case the tax rate is reduced to 36%.
Savings and investments
Tax is not paid on savings which are in tax-free savings accounts. These tax-free accounts include individual savings accounts (ISAs) and some national savings accounts products such as savings certificates and premium bonds.
Capital gain tax
Capital gains tax (CGT) is levied when an individual sells land, property or a business. These assets can be personal or business, however if someone sells their main home it will not be subject to CGT. For 2016/17 the rates of CGT are 10% and 20% for chargeable gains with the expectation of those made on the disposal of residential property that is not eligible for private residence relief.
Retirement planning and pensions
Planning for retirement is important, the first thing anyone should do is work out what income they will need. Income tax is still levied when an individual retires. All income bar the standard state pension is liable for income tax.
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