In the UK we pay more than ?450bn tax each year. But by getting tax-efficient you can keep your contribution down. Don't miss these tax 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 tax year which runs from April 2008 to 2009, it is ?6,035 for the under-65s; ?9,030 for those aged 65 to 74 and ?9,180 for those 75 plus.

The next ?2,320 of income is taxed at 10%. Then the basic rate tax of 20% is charged on the next ?34,800. Income over ?34,800 is taxed at the higher rate of 40%.

If you've earned less than your allowance in a tax year and been taxed, then contact your HM Revenue & Customs (HMRC) office to claim a rebate.

2. DECODING YOUR TAX CODE

People 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 can include such things as a company car and private medical insurance. 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. Pensioners' coding notices will show a deduction for their state pension because, even though it is paid without tax being deducted, it still counts as taxable income

Higher-rate taxpayers will have extra deductions to include income e.g. savings interest and dividends from shares. If you receive the basic personal allowance of ?6035, your number will be 603.

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 + the married couple's allowance + 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%. Higher rate payers should declare any interest on a tax return and pay accordingly. 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 earn above 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 SPOUSE NOUS

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 income from dividends 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. On ?10,000 of savings, paying 6% before tax, a non-taxpayer would earn ?600 a year, a basic-rate payer ?480 and a higher-rate payer ?360. So switching savings could save ?240 tax.

Top tip: Don't hold the money in joint names because HMRC will assume you each earn half the interest.

5. SAVE ON YOUR SAVINGS

Anyone aged 16 or over can invest up to ?3,600 per tax year in a cash ISA. Top ISAs tend to pay more than taxed High Street accounts and the interest is tax-free. So ?3,600 in an Isa paying 3% would give ?108 interest a year. In a taxed account it would pay ?21 less to a basic-rate taxpayer and ?42 less to a higher-rate payer. Stock market ISAs are free of capital gains tax and free of income tax on corporate bond income. Higher-rate taxpayers also avoid extra tax on dividends.

You can save ?4,000 this tax year into a stock market ISA if you also have a cash ISA. Otherwise you can invest up to ?7,000. Other tax-free savings include a range from National Savings & Investments'. Those needing income could consider certain insurance company bonds which allow you to take 5% a year income for 20 years without paying immediate extra tax. Also Friendly Societies allow for tax free savings.

6. OFFSET YOUR MORTGAGE

Rather than paying tax on savings interest, some banks and building societies will allow you to set your savings against your mortgage. You won't earn interest on your savings, but you will pay less on your mortgage. As a result, you'll cut its term. On a rate of 5.95%, for example, if you offset ?10,000 against a ?100,000 mortgage then this is equivalent to earning 7.44% on that money if you're a basic-rate taxpayer or 9.92% if you are a higher-rate taxpayer.

With interest rates at such a historically low rate however do your sums carefully to see how this may or may not be in your favour.

7. PICK UP A PENSION

Saving into a pension is a fantastic way of snatching money back from the taxman. For every ?78 you save you'll get ?22 tax back, boosting your investment to ?100. If you're a higher rate taxpayer you can claim the extra 18% back, so every ?100 investment will effectively cost you ?60.

When you retire, you can take 25% of your savings as a tax-free lump sum, but you will be taxed on your pension income. A preferred option, if available, is the final salary scheme offered by some employers which bases your pension on the number of years you've worked and your salary when you leave.

Private pensions and employer backed contributory pensions rely on the stock market but offer the same tax perks.

8. BEWARE THE AGE TRAP

Pensioners rightly loathe the age allowance trap. This starts to remove pensioners' higher tax allowances once their income breaches ?20,900 a year (more than ?5,000 below the average wage). Once triggered, ?1 of pensioners' allowances are taken for every ?2 of income until their allowance falls to that of the under-65s. It gives them an effective tax rate of 33% on a portion of their income.

Those on the fringe of this trap may be able to avoid it by using tax-free savings such as cash ISAs and National Savings Certificates.

9. USE YOUR CAPITAL GAINS TAX ALLOWANCE

Everyone can make ?9,200 a year capital gains without paying tax, but few of us make use of this. One option is to use equity bonds. Here you invest a lump sum for a set number of years and your return is based on any rise in the stock market.

Some guarantee your capital, others do not ? and these latter ones can be very risky. Those issued by insurance companies usually regard your profit as a capital gain so you can make ?9,200 without paying tax. But others treat it as income so you will lose income tax.

10. CLAIM GIFT AID

If you're giving to charity regularly, use Gift Aid. This boosts the gift to the charity and allows higher-rate taxpayers to claim back some tax. Simply keep a record of any regular or one-off gifts made using Gift Aid and remember to include them on your tax form. For every ?10 given, the charity gets an extra ?2.80 and higher-rate taxpayers can claim back ?2.30 tax relief.