Blog 5: Tax Avoidance vs Tax Evasion

Many young people don’t know the difference between the two, nor how they can use tax avoidance to their advantage. Tax is another area that we are never taught in schools yet it’s a day to day issue we need to consider either as employees or self employed businesses.

Tax Avoidance

So what is tax avoidance? Tax avoidance is legal and should be somewhat encouraged if you want to be financially intelligent and benefit your personal wealth.

Tax Avoidance can come in all different methods. You’re probably doing tax avoidance without even realising it. For example, any ISA is a form of tax avoidance as you are allowed tax free returns on £20,000. If you’re an employee and you get paid through PAYE, you’re tax avoiding because your personal allowance is a form of tax avoidance.

These are examples of basic tax avoidance, there are more advanced methods which are usually more effective for higher earners, such as, pension contributions, charitable gift aid payments, VCT’s, AVC’s and SEIS (These are types of investments which are used mainly to avoid tax but can also give you a decent return)

These methods allow you to have more of your income taxed at a lower band or have less of your income as taxable. REMEMBER tax avoidance is LEGAL.

Tax Evasion

Is ILLEGAL, this is where you intentionally lie or hide your money from the tax authorities. This is not a smart thing to do because if you get caught you can get taxed 100% of what you were hiding plus potentially prison time on top. An example of tax evasion is redirecting your income to a country where there is no income tax E.g. the Cayman Islands. You set up a holding company that operates out of the caymans, the money gets sent directly to them. Then you have to worry about getting the money back into the country you live in. But like I said its illegal.

Be a tax avoider, not an evader.

People sometimes say that tax avoidance is not for the poor but this isn’t true, it doesn’t really matter what income you have you can always tax avoid, however the higher the income the more effective the tax avoidance becomes. For example, if you make say, £17,000 a year you could probably tax avoid most of that away. You get £12,500 of that taken off from your personal allowance. If you’re married, your partner can transfer £1,250 to you in tax credits. So now we’re left with £3,250 which is taxable. If any of that income is from savings interest you can have up to £1,000 taken off. If any is dividend income you can have £2,000 off. Furthermore you can make charitable payments or pension contributions as well which overall will either wipe your tax bill out or leave you with a very small amount of tax to pay.

So, anyone can tax avoid, regardless of income.


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