How to legally reduce your tax bill in your bouncy castle business

Know your Personal Allowance

Your personal allowance states how much of your income you are allowed to keep from savings, pensions and earnings before tax is due. This tax year runs from April 6, 2007 to April 5, 2008. For those under 65 it is £5,225, for 65 to 74 it is £7,550 and for 75 plus it is £7,690.

After that 10pc is charged on the following £2,230, after which the basic rate tax of 22pc will be incurred on the next £32,370. An exception to this is if your income is from savings interest which will be at a lower rate of 20pc. Income over £39,825 will be taxed at 40pc.

For married couples where one was born preceding April 6 1935, married couple’s allowance of £6,285 is applicable, (£6,365 for the over 75’s). This will be at the rate of 10pc.

It is in your interest to contact HM Revenue & Customs (HMRC) office to claim your rebate.

Understand your Tax Code

Many people are overcharged each year because of an incorrect tax code, so make sure you are in the right category.

HMRC calculates your code by deducting the value of your benefits from your personal allowance. These may include company cars or private medical insurances.

Coding for pensioners will show a deduction for the state pension because it is counted as a taxable income. People receiving married couple’s allowance will notice a deduction because it takes into account that they are getting the rate of 10pc.

If you are in a higher rate tax bracket there will be more deductions to take account of things like savings, interest and share dividends.

If you qualify for the basic personal allowance of £5,225 your code number will be 522 there will also be a letter indicating which kind of taxpayer you are.

L: Means you receive basic personal allowance

P: Means you are between 65 and 74 and receive full personal allowance

Y: Means you are 75 and over and receive full personal allowance

V: Means you are between 65 and 74, receive full personal allowance and married couples allowance, but pay tax at the basic rate.

K: Means you get you get no tax allowance or you owe money to HMRC.

T: means information is missing and are unable to give the correct code.

Don’t get Taxed on Savings

The interest of savings tax is at 20pc. If your family are not paying tax, then get an R85 form from your bank or building society. This will instantly increase your savings.

If you are only just slightly above your personal allowance level, your rate should be 10pc. Banks and building societies can’t do this, and will deduct 20pc, so the onus is on you to reclaim the difference each April by filling out an R40 from available from the Revenue.

Married Couple Savings

You can use your spouses unused tax allowance, or if they pay a lower rate tax take advantage of this. If the higher tax payer of the couple gives their savings to the other the tax will be less. Obviously you need to trust your spouse. This won’t work if the savings are in joint names, as the HMRC assume you both earn half the interest.

Pay less Tax on your Savings

Consider investing in an Isa. This is available to those over 16 and they can invest up to £3,000 a year.

A Top Isa usually pays more than High Street accounts and the interest is tax free. Those investing in Stock market Isas do not need to pay income tax on corporate bond income or capital gains tax. Those in the higher tax paying bracket will not have to pay extra tax on dividends.

Also tax free, are National Savings & investments index-linked certificates and insurance company bonds. Always talk to an independent advisor as there are many awful bonds and few really good ones.

Get an Offset Mortgage

Some banks and building societies allow you to offset you savings against your mortgage. This means that although you won’t earn interest on your savings you will reduce your mortgage and in turn reduce the term.

Save with a Pension

Saving into a pension could earn you £22 tax back on every £78 you save. Higher rate taxpayers can claim back 18pc.

On retirement 25pc of your savings can be taken a tax-free lump sum; however you will be taxed on your pension income.

The best solution if available is a final salary scheme offered by some employers which will link your pension to your final salary and number of years worked with the company.

The Loathsome Age Allowance

The age allowance starts to remove pensioners’ higher tax allowance as soon as their income goes above £20,900 annually, which incidentally is more than £5,000 less than the average wage.

When this kicks in, £1 of the pensioner’s allowance is taken in tax, of every £2 of income until their allowance drops to the rate of those under 65.

Those on the borderline of this may be able to avoid this by investing in tax-free cash Isas and National Savings’ Certificates. The main thing is to not jeopardise your income by making tax concerns dictate your entire investment plans.

Capital Gains Tax Allowance

Very few people make use of the £9,200 annual capital gains that is free of tax. A possibility is to use equity bonds. This works by investing a lump sum for a required number of years. Your return will be based on rises in the stock market, though this can be risky as not all will guarantee your capital. There is website available giving information of these bonds. www.lowes.co.uk

Remember to Gift Aid

If you give to a charity you can increase the amount they receive by completing a gift aid form. For every £10 you give your chosen charity, they can claim back £2.30 in tax relief.

For more advice visit: www.thisismoney.co.uk/taxguides

This article was posted by the BIHA in Nov 2007. To read more articles about how to run a more profitable and successful inflatable hire business and cut costs! Please visit: www.biha.org.uk