An article by Paul Spallini of ImagineFS
“What is tax planning and what tax reductions could it help me achieve?”
Contrary to popular belief, tax planning is very different to both tax evasion and tax avoidance. Tax evasion is the practice of not paying tax you legitimately owe altogether, usually by failing to declare a taxable event or ‘hiding’ funds in an offshore bank account. For obvious reasons, this can result in prosecution and large interest and penalty payments. In extreme cases, it can mean a prison sentence.
Tax avoidance is the practice of operating within the letter of the law, but stretching the interpretation of the tax legislation as far as it will go to achieve the best possible tax reductions. For example, claiming tax relief on a business where you have no genuine involvement beyond an initial investment would fall under this banner. Although it is technically legal, it raises some serious ethical concerns. That’s why, although it is certainly not the same thing as tax evasion, the concept of ‘unacceptable tax avoidance’ is becoming increasingly widespread. As a result, HMRC are (understandably) currently working hard to close the loopholes and make such schemes significantly harder to implement.
Tax planning, on the other hand, simply involves using existing regulations exactly as the government intended while still looking for ways to pay less tax. There is nothing shady or aggressive about it, as you are operating within both the spirit and the letter of the law, rather than taking advantage of loopholes before they close.
A good example of such a tax reduction arrangement would be a UK pension where tax relief is granted on the contributions to the pension and no UK tax arises on the income and gains as they arise. Tax becomes payable in the future when a pension is taken, but the fund has benefited by not paying tax as the value accumulates. It’s simply choosing the most tax-efficient option out of the ones already available for a genuine commercial transaction to reduce your tax bill, as opposed to creating an artificial arrangement where tax avoidance is the primary goal.
If you’d like more expert advice on completely legal ways to achieve tax reductions, just visit www.imaginefs.com/freeguide, where you’ll be able to request a free copy of my new guide, “A freelancer or contractor’s guide to maximising your income and achieving financial independence: An alternative approach to making sure your money stays in your own pocket”, packed with expert financial advice on everything from freelance taxes to contractor accounts.