Looking after the pennies...
My Granny always used to say: “Look after the pennies and the pounds will look after themselves”.
I generally regarded this statement as an excuse for being over-careful with money. However, I have to say there is a lot of sense in such a principle.
For example in the early days of our business, we would have a takeaway meal once a week. When funds were tight I realised that this was £15 per week.
To have £15 to spend we needed to earn £20 (leaving about £5 for tax.).
Multiply this up per week and we had to earn £1,000 a year to pay for a Chinese once a week! An easy saving — even if it only meant downgrading it to a monthly treat rather than a weekly one.
Today I am going to talk about three small matters which can save you modest amounts each tax year, but they all add up.
Tidy up your savings. If one person in your relationship pays tax at a lower rate than the other, there may be advantages to putting savings in the low-tax-rate person’s name. Be cautious here because that does make it easier for them to run off into the sunset clutching your fivers!
If Mrs Bloggs pays 40% tax and has savings in her name, then bank interest will cost her dear. For every £1,000 of interest she will lose £200 in tax at source — receiving £800 net.
However, then the Revenue will be entitled to a further £200 from her — making her tax on savings the proper 40%.
Assuming Mr Bloggs pays only 20% tax, then having the savings in his name would save a full £200 per £1,000 of interest. (Should Mr Bloggs be a non-taxpayer then a full £400 could be saved.)
If Mrs Bloggs wants her name on the account they could set up a joint account. That way the saving would be halved, but still be £100 per year. Note that joint accounts have double the protection in the event of the failure of the bank.
Get your tax code right. A surprising number of people have incorrect tax codes. Something might be deducted to tax an income source (like rents or gross interest) which stopped ages ago.
Often a phone call to the tax office can have that rectified.
For years up to 2007/08 you can see detailed rates for all sorts of occupations at http://www.hmrc.gov.uk/manuals/eimanual/EIM32712.htm. This link also shows you the new rates for the current year 2008/09.
Examples include uniformed fire officers — tax code allowance in 2008/09 of £80 (this could save up to £32 per year). Nurses and midwives get £100 allowance this year, healthcare receptionists £60, police officers £140, and bus drivers £80.
The list is quite long — before today did you know what a currier was? Answer: it’s someone who finishes leather after it has been tanned. Curriers get an £80 allowance.
If you have not had the allowance in the past six years then you can still ask for the Revenue to give you it. A £20 refund x 6 years is not to be sniffed at — for the sake of one letter to HMRC.
Pension contributions. There are two categories here — those for yourself and those for your family.
For yourself then no matter how much tax you pay, you can contribute to a personal pension.
For every £80 you put, in the Government will kindly add £20 tax relief. This is even if you paid no tax. If you pay higher-rate tax then you will save a further £20 when you do your tax return. So £100 invested ends up costing only £60. Pension contributions for the family are a great way of building up savings for their later years. If you have a non-working spouse or partner, then you can invest up to £2,880 per year for them.
With tax relief added this means £3,600 going into the fund. Money for nothing.
Pension investments can be very cautiously placed — for example in a ‘cash fund’ which grows slowly like a building society account but is not subject to the drops that can happen if the stocks and shares go down.
This sort of pension (up to £2,880 per year) can also be set up for your children. Our school-age boys each have a pension and I enjoy seeing their tax relief being added, even though they don’t pay tax.
Don’t be a victim of the tax system — let it work for you and save a few quid.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.hustontax.com or (028) 9080-6080.