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Is Tax Planning Legal? | Your Tax Planning Questions Answered

The subject of taxes and tax planning is often met with suspicion and confusion by our clients. Isn’t it illegal to pay less tax? Is it ethical to plan your finances to accommodate for tax?

In short, yes, tax fraud is illegal (and unethical). However, there is a difference between tax fraud and planning your affairs more effectively to accommodate the liability of tax, provided it is not designed to disguise income for the sole purpose of avoiding tax liability that should be chargeable. The truth is, research has shown that as many as 30 million people are paying too much tax. More than £5bn – or around 5% of HMRC’s expected income – could have been saved if people had arranged their affairs more efficiently.

For this reason, we’ve compiled some of the answers to the most common questions around tax planning, to put your mind at ease and perhaps help you in your decision to seek advice around tax planning for your financial present and future.

Is Tax Planning Legal?

Legitimate tax planning can come in many forms. One of the most popular is for company directors (who are also shareholders) to pay themselves a salary up to the tax-free personal allowance and then pay themselves dividends to supplement their income. Dividends are taxed at a much lower rate than the standard income tax rate (20%).

Another form of tax planning can include investments, namely pension contributions. Tax relief is given to payments into pension schemes, and the amount of tax relief is dependent on how the contribution is made. Both of these are recognised as legitimate tax planning practices and are fully legal.

Is Tax Planning Ethical?

Legitimate ways of reducing your tax bill is fully ethical and encouraged. If you do not need to pay tax, or you’re paying too much, why should you? It is more money in your pocket to spend on the things in life that are important to you. Where the moral argument begins to fall down is when tax avoidance or evasion schemes are entered into.

Tax avoidance schemes are legal but encourage practices that would be frowned upon by HMRC and can often lead to legislation changes to close loopholes. Tax evasion is where a party is neither compliant with the law regarding their tax payments, nor within the spirit of the law. Both of these practices are unethical, and tax evasion is, indeed, illegal, and is not part of the tax planning services that independent financial advisers, such as Greenfields, offer.

Is Tax Planning Effective?

Legitimate tax planning can be incredibly effective. Take the example below, which fully explains our above point regarding company directors and how they can be paid. If a company director pays themselves a salary of £30,000 per year (with no other income/pension contributions), ultimately, they will be entitled to pay a total of £8,855 in tax. However, when compared to a mixture of dividends and salary out of this same £30,000, this same director could reduce this tax liability to £7,734, over £1000 less than they originally were required.

Just paying a salary of £30,000 (calculated yearly, to the nearest £):

Total Tax – £8,855

Paying a salary of £12,500 and £17,500 in dividends (calculated yearly, to the nearest £): 

Total Tax – £7,734.50

Overall, tax savings of this size and more can be achieved with effective planning, however it is recommended that individuals use the help of financial and tax experts to ensure your tax planning strategies remain legal and ethical.

At Greenfields, our advisers are qualified and experienced in all aspects of tax planning and management and would be happy to help optimise your tax strategies to get you the best returns. To book your FREE initial appointment with us, email us at ian@greenfields.biz, or call us on 01202 857101.

All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and Her Majesty’s Revenue and Customs (HMRC) practice. Levels and basis of tax relief are subject to change.