The tax year has just ended and the Budget is still to come. But there are still things you can do to cut your tax bill.
If you have a job or a pension which is taxed under Pay As Your Earn the first priority is to check your tax code. Tax codes are the way the Inland Revenue gets your employer or pension provider to take off the right amount of tax before you even see your own money. But tax codes are simply a way of collecting the tax, not assessing it. They are always approximate and often wrong. If yours is wrong you end up paying too much tax.
You should already have had a Notice of Coding last month with your tax code and how it is worked out. You should also soon get a P60 setting from your employer to tell you how much your income and tax were in 2001/02. Both these documents should be checked. Look at the figures on them and the arithmetic to see if they seem right. If you are 65 or 75 before April 6 next year check you have the higher personal allowance. If you have a child under 16, make sure you have an entry for the children’s tax credit which is worth £520 a week off your tax bill – but couples where at least one partner pays higher rate tax may not get this credit. And it is even better in the present tax year, 2002/03. The tax credit is doubled to £1040 for a parent who has a baby born in the tax year. The amount is the same however late in the tax year the baby is born – so there’s still time to get cracking and save yourself £1040 this tax year! You only get one tax credit however many children you have. There is a children’s tax credit helpline on 0845 300 1036. For other enquiries contact your local Inland Revenue Tax Enquiry Centre.
Taxes may well rise when Gordon Brown announces his Budget plans on 17 April. Although Scotland now has its own Parliament, the Chancellor at Westminster still makes the crucial decisions on income tax and Customs & Excise duties. The Scottish executive has committed itself not to use its tax raising powers before the next Scottish election at least. So if Gordon is to raise our taxes where will the burden fall and can we avoid it by canny action now?
The most popular prediction by the accountants who watch these things is a rise in the rate of VAT. It has been fixed at 17.5% since 1991 and is now one of the lowest in the European Union – pity the poor Swedes paying 25% VAT on almost everything they buy. A rise to 19%, predicted by Mike Warburton of accountants Grant Thornton, would still leave the UK around the middle of the EU VAT table. It would raise £5.5 billion. And he thinks the burden might fall on businesses not individuals
"An increase in VAT could mean that businesses will be forced to cut their profit margin in order to continue to offer the same value for money prices for their customers."
In other words, if VAT rises from 17.5% to 19%, a pair of shoes costing £49.99 would go up to £50.63 – not a price most shops would want to charge for long. So it could be rounded down – or up. Valerie Smart a senior tax manager with accountants PricewaterhouseCoopers in Edinburgh thinks that pretty soon price rises would be passed on.
"Some shops would absorb the cost in the short-term but they will have to pass it on eventually. They could put prices up by more than the extra VAT. And it’s not the luxury items that will hit us – it is the day to day items that we have to buy such as clothes and washing powder."
The rise would be 1.28% on those items that are subject to VAT. A £1000 computer would cost an extra £12.77. A £12,000 new motor car would cost an extra £153. So if you are planning a major purchase it may be worth buying it before 17 April.
Of course the easiest and in many ways the fairest way to increase taxes is to raise income tax. But the government has promised that it will not put up the basic 22% rate of tax nor the 40% higher rate, and it has already announced the tax-free allowances for 2002/03. One sneaky way to raise more tax would be to freeze the level at which higher rate tax is paid. Currently it kicks in for people under 65 on incomes above £33,935 (about £1500 more for those over 65). By rights that should rise to around £35,000 for 2002/03. But if it was frozen that would bring more people into the higher rate tax bracket and raise more money for the Treasury.
Valerie Smart says that is a possible move. She also says similar action could be taken with inheritance tax. That starts when someone dies and leaves property worth more than £242,000.
"In city centres like Glasgow and Edinburgh, and some other places in Scotland, many houses are worth more than that. If he does not raise it, or even raises it by inflation, house prices are rising so strongly that will bring many more people into the scope of this tax."
The other popular prediction by accountants for raising tax is higher National Insurance contributions. At the moment, employees pay no National Insurance contributions on income above a certain amount – from April that limit is £30,420 a year. If the ceiling was abolished that would in effect put an extra 10% tax on all earnings over that amount and raise at least £5 billion. Alternatively he could raise the rate to 11% and keep the ceiling. Either way people over pension age would be protected as they do not pay National Insurance contributions. Mike Warburton thinks it is less likely than a rise in VAT but is still a possibility.
"Some people think the Chancellor does not need to raise taxes at all. But if he must then VAT or National Insurance are the two simplest ways to do it. When he raised petrol duty he faced riots. If he puts up tax on tobacco or alcohol he will increase the differential with the rest of the EU and make the problem of smuggling even worse. If taxes are raised and it is not VAT then a rise in National Insurance is likely. I suppose you could try to avoid it if, for example, you were going to give staff a bonus, then do it now rather than later. But realistically a change in National Insurance would not happen until probably October because of the need for employers to change their computer payroll systems."
So perhaps the best way to save some tax is to wait to fill up your car or buy the booze for the weekend until after the Budget on Wednesday April 17th. Cheers!
7 April 2002
e-mail Paul Lewis on paul@paullewis.co.uk