ACCOUNTANT EXPLAINS: How to Pay Less Tax

Taxes are going to be one of the largest expenses of your life and whilst you have to pay it, there are many ways in which you can reduce your tax bill legally. So in this video I'm going to uncover what they are and how you can keep more of what you make. This video is a highly requested one. I asked you in one of my recent videos if you want to see this video on tax that I had planned out and out of the 1000 plus comments 95% of you were all for it. As a disclaimer I am a qualified accountant but I am not a financial advisor, I'm just educating you on the possibilities of what can broadly be done wherever you live. But with this information you need to find out what is relevant for your own country and seek financial advice in the country that you're in. Right if that introduction didn't give you enough time to click off then you're here to stay. So let's get into it. I'm going to be bold and assume you have zero knowledge about taxes and so I'm going to cover the basics, the misconceptions and then build it out from there. I've got everything timestamped in the description below so you can click to whatever part that interests you the most and there'll also be follow-up videos to this as well as we get more and more into the details. Let's start with how is income tax calculated? There is a common misconception that the more money you make the higher the tax rate you'll pay on your full salary. So I was speaking with someone last week and he was saying how he doesn't want a pay rise because he's currently at the 20% tax bracket and if he gets a pay rise it will move him into the 40% tax bracket so he will end up making less money but this isn't exactly correct. Most countries have tax brackets and these tax brackets are different depending on what part of the world you're in but they apply in a similar way using a progressive tax system. So what that means is you get taxed on the next pound or dollar of income depending on what bracket that next pound or dollar falls into. So say you had the following tax brackets in the country that you live in. If you're an employee earning 60,000 that you fall into the 40% bracket but it doesn't mean you're paying 40% of that full 60,000 in taxes. What it actually means is that for the first 10,000 you're not paying anything in taxes. Once you max out that bracket you move into the next bracket so you're paying 20% rate for the next 40,000 until you max that out and then you move into the next bracket which is 40% until you max that out but in this case it's just the remaining 10,000. So if you're making 60,000 according to these numbers you're paying 12,000 in taxes. This is broadly how it works there are some nuances and you want to check for your country what those nuances are. For example in the UK once you hit six figures as an employee then you start losing that tax free allowance so you're effectively paying even more away in tax. Now we've covered that let's move on to how you can reduce your taxable income. One of the easiest ways to reduce your tax bill is through pension contribution. Pension contribution is called different things depending on where you are it's the 401k if you're in the US so you need to check what it's referred to in your respective country. What's the idea behind this? If you're an employee working for a corporation you are getting taxed straight away as soon as that money comes through the door. It is getting taxed before you even see it but with a pension contribution you're able to put a portion of your paycheck away into your pension pot and then you'll get taxed on whatever is left so the end result will be you pay income tax on a smaller amount and whatever money that is in your pension pot will be invested with tax free earnings. So say your salary is 60,000 if you weren't putting away anything into your pension and assuming no other deductions you'd be paying 12,000 in taxes as we spoke about earlier. Now say you decide to instead put 500 a month of that into your pension or into your 401k every month so that's 6,000 in the year that goes straight into your pension pot without getting taxed and so your taxable income instead of it now being 60,000 it's 54,000 so instead of paying 12,000 in taxes you're only paying 9,600. This is even better if you have an employer that has a match contribution system and so for every pound or dollar that you put in they do the same. This is free money that's also tax free. On the flip side or the downside however this money is locked away and you can't access it until you retire although there are things you can do like borrowing from it to buy a property for example but generally speaking this is you saving away until you retire. If you are in a position to contribute to your pension and you don't necessarily need that money at the moment this is a really good way to reduce your taxable income and therefore reduce the tax that you pay. The next way to reduce a tax bill and this is one that I briefly touched upon in my bad money habits video is to make sure you're earning through the right structure suitable for your position and in this case we're talking about as a company rather than as an individual and this really applies when you have a side hustle or a business. So for example I'm here speaking to you as an individual but I'm operating as a business so the way I'm getting paid from sponsors from affiliates from YouTube is through a company that I have set up and all I needed to do was firstly set up a company online and secondly set up a company bank account so all my invoices have my company bank name on it. So as an employee working for a corporation you earn you pay taxes and then so if I'm earning 60k I pay 12k in taxes and then I have 48,000 left to spend. Now say I earn the same amount through YouTube as a side hustle I earn 60,000 I'll then deduct my expenses so that can include a wide variety of things that can include my camera my mic my laptop that I use to edit a portion of my electricity bills for this room as it's my work from home YouTube or studio courses meets there are a lot of things that you can expense which you want to speak to your advisor about and then you pay tax on the remaining amount and on top of that the company or the corporation tax rate isn't the same as the income tax brackets we saw earlier and in most western countries it's a lower rate and in the UK at the moment it's currently 19 so as long as I keep this money in the company I won't be paying any income tax on it I can keep spending on business stuff and investing through my company and deducting it as an expense. What I can also do if I wanted to is draw myself a salary but the moment you draw money out of this company is subject to those income tax brackets we spoke about earlier so you want to structure this in a way where you stay in the lower threshold and reduces the overall tax that you're paying. The next way to pay less tax relative to the amount you make is by earning money through streams that the government views as non-taxable one of the most simple but effective ways to do that is through investing via a stocks and shares ISA this is called different things in different countries in the US it's a Roth IRA and this is essentially an investment account that shields your profits and gains from the taxman and I'll show you how to set one up in just a second. So just to clarify this doesn't reduce your taxable income this year but you get the tax benefits on the back end when you pull it out at least this is the way it is right now if you're in the UK you may have seen the recent headlines that Jeremy Hunt is looking to introduce some new rules around this tax free saving we'll wait to see how that pans out but in the meantime I'm currently maximizing out my ISA allowance as much as possible in the meantime. There are a number of investment platforms you can use one of them being Trading212 which is an investment platform that I've used for the last four years and they're also sponsoring this video. This app has the typical things I look for and that's firstly that's regulated in this case it's FCA regulated it has an automatic investment feature which makes me a lot more disciplined with my investing and thirdly I can buy fractional shares with zero commission. If you're new to investing then I have an ultimate beginner guide to investing and I'll link that here for you but what I like about this investment app as well is that it has a practice mode and a real money mode which means you can start investing and practicing to invest with fake money with pretend money that reflects the current markets and then once you're ready you can move into the real mode. Trading212 are giving anyone who signs up using the coupon code What you do with your free shares is none of my business, you can invite another friend, you can get more free shares, you can sell and cash out if you want to but a better option in my opinion would be to use this to start your investment journey in a way where any gains are tax free. I've started this tax video series with three of the most applicable ways to reduce your tax bill but honestly this is me just scratching the surface. In future videos I can go over how to set up offshore accounts which again is available to everyday citizens like you and I, not just the Facebook and LinkedIn's of the world. I can go over property tax, stamp duty, how to get energy efficient cars for nearly half the price with the tax savings or if you have something else you've heard and want me to make a video about then let me know in the comments below and I'll make that for you. This is just guidance but I promise you spending a few hundred here or there for a professional advisor is well worth it, it will save you thousands in the long run. If you found this video helpful please share it, it helps spread the message of financial education to more people. I've also got another video here on investing for beginners and I'll leave that here for you. Thank you so much for watching, don't forget to subscribe if you haven't already and I hope to see you in one of my next videos.