Seven legal ways to help you bridge the tax gap

HuNDREDS of thousands of workers face paying a £5,500 premium to live in Scotland because of the SNP’s decision to freeze the higher rate tax band.

Those earning more than £43,000 are now paying 40p tax on anything above this level after the Scottish government used its new devolved tax powers to freeze the threshold.

In the rest of the uK, the threshold has risen to £45,000 this tax year and Chancellor Philip Hammond has promised that it will rise to £50,000 by 2019-20. It means someone earning £50,000 in Scotland will owe around £400 more income tax this year, compared to someone on a similar salary in England or Wales.

The same worker would end up paying £1,400 a year more in income tax – or £116 a month – within three years if Scottish income tax thresholds remain frozen. And by the end of the next parliament in 2022, they could have paid £5,500 more than their English counterparts unless Holyrood ministers act.

Among the 370,000 workers hit will be senior teachers, police officers and public servants, sales and business managers, train and tram drivers, solicitors and financial advisers.

Here are seven legal ways to help close the tax gap.

CHECK YOUR TAX CODE

You should by now have received your tax coding notice from HMRC.

Make sure it is correct because you could be overpaying if not.

If the code contains the numbers 1150 it reflects your new £11,500 tax-free personal allowance. If your code is different, it may reflect tax deductions to account for pensions, tax you owe from previous years or work perks.

To decipher your code, type ‘Check Your Income Tax’ into the search bar at gov.uk or call HMRC on 0200 300 3300.

SACRIFICE YOUR SALARY

You can reduce your tax bill by giving up part of your salary in return for work perks from your employer, such as childcare vouchers.

This reduces your taxable pay. So you pay less income tax and less National Insurance.

You may be able to reduce your taxable pay below £43,000 to become a basic rate taxpayer. Basic rate taxpayers can exchange up to £243 of monthly salary for childcare vouchers. For higher rate taxpayers, the figure is £124 and for additional rate payers £110.

A calculator at gov.uk shows whether vouchers will affect your eligibility for the childcare element of Working Tax Credit.

Childcare vouchers will be replaced next April for new signups to Tax Free Childcare, which will also be available to the self-employed.

Check salary sacrifice won’t affect your entitlement to maternity pay, a mortgage or the life cover your employer offers.

SAVE INTO A PENSION

A PoPuLAR way for middleearners to reduce their tax bills is to save into a pension. You can do this through your company or you can save into a private pension.

With the latter option, any contribution up to £40,000 a year is topped up with the 20 per cent basic rate tax you paid on that money.

So you need to save only 80p to get £1 in your pot. Higher rate taxpayers can claim back the additional 20 per cent on their tax returns at the end of the year.

You cannot withdraw this money until age 55. When you do, a quarter of the fund is available tax-free.

BOOST SAVINGS RETURNS

SAvINgS rates might be at rockbottom but the new personal savings allowance gives reason to stick at it. Higher-rate taxpayers can now earn £500 tax-free on top of any returns from Isas.

This is the same as a 2 per cent return on savings of £25,000.

Basic-rate taxpayers get a higher £1,000 allowance. So if your spouse or civil partner pays basic rate tax, it makes sense to put any savings in their name.

Don’t forget Isas. Every individual now has a £20,000 allowance covering cash, stocks and shares, Innovative Finance, Help to Buy, and Lifetime Isas.

COLLECT SHARE DIVIDENDS

INvESToRS can also earn up to £5,000 tax-free from share dividends. Plans to cut this allowance to £2,000 have been temporarily shelved due to the general Election. Cash in while you can.

SELF-EMPLOYMENT PERKS

SELF-EMPLoYED workers can claim allowances for their home office, car and travel, phone and broadband, investment in equipment and other expenses. Keep the paperwork and find a good accountant to avoid costly mistakes.

If you work for yourself you won’t get a company contribution into your pension. So it could be worth investigating the new Lifetime Isa. The government will boost any savings by 25 per cent, adding a maximum of £1,000 to a £4,000 contribution a year until you are 50.

You need to be under 40 to apply. You lose all the top-up and face a charge if you cash in before age 60.

GO PART TIME

THE amount you can reinvest into a pension once you’ve taken money out was due to be cut from £10,000 a year to £4,000. But the move has been postponed due to the election. If you can, it’s worth making the most of the extra allowance before it disappears.