Three Tips for Avoiding Unnecessary Tax Charges

There are two certainties in life, according to Benjamin Franklin and Mark Twain. Those certainties are death and taxes. Avoiding the former is impossible. It’s also inevitable that you’ll pay at least some tax if you make money. However, unlike death, there is a way to reduce the impact of tax.

One easy way to pay less tax is to earn less. That’s not an ideal solution, but it’s effective. Of course, if you want to earn a decent amount and be as tax efficient as possible, you need to consider your options carefully. Again, you can’t avoid tax but, with the following three tips, you can reduce the amount you pay unnecessarily.

1. Knowledge is Power

Knowledge really is power when it comes to taxes. You don’t have to be an accountant to understand the value of adding expenses to your annual return. Each legitimate expense you declare will reduce your tax liability. It’s also worth knowing how much you have to pay in a variety of scenarios. For example, the basic tax rate in the UK is 20%. However, if you earn over £50,271, a portion of your earnings is taxed at 40%.

It’s the same with investments. If you put money into stocks, for example, and make a profit, you’re liable for tax. Sticking with the UK as an example, capital gains on investments are taxed at 10% or 20%, depending on your personal tax rate. However, what’s also worth knowing is that you have an annual allowance of £12,300 (2022/2023). Therefore, by knowing these simple facts, you can plan accordingly.

If you didn’t want to pay any capital gains tax, you could simply end an investment before it earns you a profit of £12,300. Alternatively, you know that anything you make won’t be taxed until you breach this threshold. Finally, only once you understand your potential liabilities can you plan ahead and implement our final two tips.

2. Use Savings Products

You can almost always find a tax-efficient way to save and/or invest money. In the US, Roth Individual Retirement Accounts (IRAs) allow you to save money without paying tax on the interest accrued. This is because the money you invest will have been taxed before going into the IRA. The only caveat with an IRA is that the money can only be withdrawn at retirement.

In the UK, Individual Savings Accounts (ISAs) offer a similar system. However, instead of waiting until retirement, you can withdraw money from an ISA immediately or within a relatively short period of time. What’s neat about ISAs is that you can use them as savings accounts and avoid tax on the interest accrued. Alternatively, you can use an investment ISA to buy stocks et al. Anything you invest in that’s within your annual limit (£20,000 in 2022/2023) will be sheltered from capital gains tax.

3. Put Money into Something Else

The final way to reduce your tax liability is to offset income by putting it into specific products. For example, in the US, the money you put into a traditional IRA (i.e. not a Roth IRA) can be used as a tax deduction. You can also get tax breaks by putting money into education investment schemes, such as a 529 plan.

The point here is that there are always products you can put income into and receive tax breaks. The products will vary from country to country. Therefore, we go back to our first point about knowledge. The more you know, the more you have the power to save. Tax is unavoidable but you can certainly avoid paying more than you need to with a bit of knowledge and some investments.