Tax efficiency without avoidance

There is a clear distinction between using tax reliefs as legislators intended and entering arrangements designed to circumvent them, and the first is under-used while the second attracts most of the attention.

The legitimate measures

Which exist to be used.

Tax-advantaged savings and investment accounts, which most jurisdictions provide in some form and which shelter returns from tax.

Pension contributions, which receive relief and are the single largest legitimate tax-efficient action available to most people.

Using personal allowances fully, including transferring unused allowances between spouses where permitted.

Holding assets in the name of the lower-earning spouse where jointly owned and where the tax treatment differs.

Timing disposals to use annual exemptions across tax years.

Claiming all allowable expenses and reliefs.

Charitable giving reliefs.

And employer schemes such as cycle, childcare and salary sacrifice arrangements where they are provided for in law.

Where the largest gains are

For most households.

Pension contributions, particularly for higher-rate taxpayers where relief is worth substantially more and where in some systems part of it must be claimed rather than being applied automatically.

Using tax-advantaged accounts before taxable ones for savings and investments.

Claiming work expenses and reliefs, which are frequently unclaimed and can be backdated.

Ensuring the correct tax code, since errors produce overpayment.

And, for couples, arranging income-producing assets sensibly between them, which is straightforward and frequently overlooked.

The distinction that matters

Between three things.

Tax planning: arranging affairs to use reliefs as intended — contributing to a pension, using a tax-free savings allowance, claiming legitimate expenses.

This is uncontroversial.

Tax avoidance: arrangements that comply with the letter of the law while defeating its purpose, frequently involving artificial steps.

Legislatures have responded with general anti-avoidance provisions and disclosure requirements in many jurisdictions, and many such schemes have failed in court.

Tax evasion: illegal, involving concealment or misstatement.

The middle category is where individuals get into difficulty, since schemes marketed as legitimate frequently are not.

The schemes to avoid

Recognisable features.

Arrangements promising to convert income into something not taxed as income.

Loan schemes where remuneration is paid as loans never intended to be repaid — these have been extensively challenged and have left participants with very large retrospective liabilities.

Anything requiring artificial steps with no commercial purpose.

Anything marketed with claims of approval that turn out to be registration rather than endorsement.

Anything requiring secrecy or unusual documentation.

Fees calculated as a percentage of tax saved.

And anything where the promoter, rather than a regulated adviser, is the source of the recommendation.

Participants in failed schemes remain liable for the tax plus interest and frequently penalties, and the promoters generally do not.

Getting the basics right

Which produces more than any scheme.

Check the tax code annually.

File on time.

Claim all reliefs and expenses, including backdated ones.

Use tax-advantaged accounts before taxable ones.

Contribute to a pension, particularly to any employer match.

Keep records so that claims can be evidenced.

And use a qualified accountant for anything beyond the simplest position, since the fee is frequently exceeded by the tax saved legitimately.

Where advice is worth paying for

Specific situations.

Self-employment and business structures.

Property income and disposals.

Investments outside tax-advantaged wrappers.

Inheritance and estate planning.

Cross-border situations.

Share schemes and equity compensation.

And any situation where the amounts are significant enough that an error would cost more than the fee.

Choosing an adviser

Practical checks.

Membership of a recognised professional body with a complaints process.

Professional indemnity insurance.

Clear fee structure, ideally fixed or hourly rather than a percentage of tax saved.

Willingness to explain the reasoning.

And a conservative approach, since an adviser who recommends aggressive arrangements is transferring risk to you.

The proportionate view

Worth ending on.

For most households, the available tax efficiency consists of pension contributions, tax-advantaged accounts, correct codes and claimed reliefs.

These are substantial, legitimate and under-used.

Anything more elaborate generally applies to a small minority of situations, and anything marketed aggressively to a general audience should be treated with the scepticism its history warrants.

General information only, not tax advice. Rules vary enormously by country — consult a qualified accountant who is a member of a recognised professional body.