With the Bank of England having cut rates from 5% to 1%, pensioners who rely on income from their savings are increasingly likely to see their income slashed as banks drop rates.

Furthermore, recent figures from the Office for National Statistics are showing more and more pensioners are being forced back to work to supplement their income. Combined with utility prices at record highs, there is increasing pressure on household budgets for the elderly and additional help with saving money is required.

Among the measures now actively being considered by the Treasury designed to help this group are

1.      An increase in the tax threshold for over-65s. This recognises the fact that elderly savers in particular had been hit by the interest rate reductions. Four out of 10 savings accounts are held by those over the age of 55, with many elderly people relying on a modest income from their investments to top up their pensions. On average, deposit accounts now pay less than one per cent.

2.      An extension of the limits for tax-free Individual Saving Accounts (ISAs), which have barely changed since being introduced a decade ago. The limit is currently £7,200, only £200 more than when they were introduced 10 years ago.

But do you think Mr Darling has gone far enough to help out? Even if you do not fall into this group yourself, you will no doubt have relatives or friends who do. Let us hear what you think should be done to help the elderly at this time.

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1. Check your Tax Code
Make sure you have been paying the correct amount of tax during the past year. “40L” or “36K” may not make much sense to you, so check the accompanying documents to ensure you are on the correct tax code. Mistakes do happen and can go unnoticed for years, which may mean you’re overpaying or underpaying tax. If the latter happens you’ll be asked to repay the difference, so it’s in your interest to sort out errors as soon as possible.

2. Maximise your Personal Allowance
Ensure you are taking advantage of all personal allowances. This can be as simple as transferring the ownership of assets generating an income from a higher rate taxpayer to a non or basic-rate taxpayer. For married couples such transfers will usually be free from capital gains tax.

3. Claim what is Yours
If you’ve just stopped working for whatever reason, you may be able to claim back some of the income tax you have paid.  If you’re a non-taxpayer, register to get interest gross or get your tax back. The latter is particularly important for those on low incomes who can benefit from the 10% savings tax rate.

4. Use your Married Allowance
Make sure you utilise both sets of personal allowances and basic-rate bands. This often means transferring assets between spouses so investments are made by the spouse with the lowest tax rate. If you are a higher-rate taxpayer and your spouse is a lower-rate taxpayer, you could almost halve your tax bill and not have to pay any tax at all on these savings.

5. Make the most of tax efficient savings vehicles
Make the most of tax-efficient ISAs, pensions and savings plans from National Savings & Investments. You can invest £7,200 in an ISA each year, of which £3,600 can be in cash with the rest in stocks and shares. If you don’t have an ISA but keep money in a standard savings account, you should consider switching to take advantage of these tax breaks. Pensions contributions are made out of your untaxed income, so this effectively boosts contributions by 20% for basic-rate taxpayers and 40% for higher-rate taxpayers.

6. Inheritance Planning
This is where the taxman nets his biggest haul with many estates pay hefty death duties that could easily have been avoided with a bit of forward planning.Make a will and make sure both spouses use their IHT-free allowance. In the current tax year, people can bequeath up to £312,000 before inheritance tax is due.Those with large estates may want to take professional advice about setting up a trust or making gifts during your lifetime to further reduce the potential tax burden.

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1. Check your tax code
Almost everyone will have a tax code. This code normally consists of one letter and a few numbers. If your code is a number followed by a letter, multiplying the number by ten will show you how much you can earn in the year before you have to pay tax. HMRC frequently assign incorrect tax codes. Make sure that yours is right in order to avoid paying too much tax.

2. Investigate rebates
Many of those eligible for a tax rebate are unaware of their eligibility. If you have been placed on the Emergency Rate at any period there is a high chance that HMRC owes you money.

3. Use all of your allowances.
Most individuals will receive their personal allowance for income tax and National Insurance automatically. However, there are numerous other allowances to which you may be entitled but which you may not be claiming.

4. Claim Tax Credits.
The Tax Credit system can sometimes be very confusing, with many people failing to understand what they are entitled to. There are a number of websites that will identify Credits and benefits to which you are entitled after you answer a few questions regarding your circumstances.

5. Plan for IHT.
Inheritance Tax is potentially one of the most expensive forms of taxation. The small number of individuals who make any effort to reduce their IHT burden is therefore surprising. Simple steps like making a will can drastically reduce an IHT bill.

6. Put non-earners allowances to work.
If your spouse earns less than their personal allowance, you should consider moving any income generating assets into their ownership. Making use of this could save you thousands every year.

7. Choose tax efficient savings.
Savings schemes are an excellent way to reduce your tax bill. Simple steps like using up your ISA allowance can cut significant amounts off your tax liabilities.

8. Sort your Self Assessment.
If you are a self assessment taxpayer, completing your return early can result in big savings. However, if you miss the 31st January deadline, you will automatically be fined £100.

9. Use your pension.
Pension contributions are exempt from tax. This means that you can reduce your income tax bill by putting extra cash into your pension.

10. Hire an accountant.
If your tax affairs are in any way complex, hiring a good accountant is likely to save you money.

In summary, it is surprising how few people actually take any steps to reduce their bills. However, if you take a pro-active approach to tax there is no reason why you can’t benefit by saving money that would otherwise have gone to the taxman.

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For the 2008/9 tax year your basic personal allowance (or tax-free amount ) is £6,035. After that you’re generally taxed at the following rates:

* Any income up to £34,800 will be taxed at 20%;
* Any income over £34,800 will be taxed at 40%.

Income tax is payable on:

* Earnings from full and part-time work;
* Tips and bonuses;
* Jobseekers Allowance;
* Profits from a business;
* Dividends from shares;
* Income from letting rooms or a property;
* Interest from bank or building society deposits

What income is not taxable?

* Student grants and loans
* Scholarships
* Most research awards
* Housing benefit
* Allowances from parents or spouse
* Grant from the University Access Fund

If you have income from any other source, and you are unsure whether it is taxable or not you can ask the tax office for advice. A comprehensive list of what is taxable is available from the LITRG.
Part-time workers

You shouldn’t be taxed unless you earn more than £116 per week.

Students

You will not be liable to tax if you earn less than your personal allowance of £6,035 (2008-9).

If you only work during the holidays you can ask your employer not to deduct tax by completing a form P38S which you can download from the HM Revenue & Customs (HMRC) website.

If you work during term time then you will go into the normal PAYE system and any tax you overpay will have to be reclaimed at the end of the tax year.
Personal allowance

Every single person is entitled to earn £6,035 tax-free over the tax year (April 6 2008/9). Extra allowances are given in some circumstances, such as the additional allowance if you are registered blind.

If you think you may be eligible for extra allowances look at the form entitled ‘Tax Allowances and Reliefs’ for more information.

Please note: The personal allowance for 2008-2009 was set at £5,435 when the budget was announced in April, but a month later it was decided to increase it to £6,035. The new rate was introduced in September 2008, but backdated to the start of the financial year.

How do I pay tax?

* Employed? – Your employer will deduct tax from your pay and pass it on to the HMRC.
* Self-employed? – You must keep records of your earnings, calculate how much you owe and pay the tax due to the HMRC twice a year. This is known as Self Assessment.
* Unemployed? – You do not have to pay income tax on your Jobseeker’s Allowance if your total income for the year is below your personal allowances.

How does my employer know how much tax to deduct?

* First job? – Ask your new employer for a P46. You will receive a form from the tax office asking for details of your income and employment history. When they receive your completed form the tax office will issue you and your employer with a tax code.
* Not your first job – Your previous employer should have given you a P45 when you left. This will tell your employer how much you have earned in the current year (if anything) and how much tax (if any) you have paid so far in the current tax year. This information enables them to calculate the correct amount of tax due from your next pay packet.

What is a P60?

A P60 details your earnings and tax deductions for the current tax year. Your employer provides it. The law requires you to keep a record of your taxable income for at least 22 months after the end of the current tax year.

Self-employed people do not receive a P60, but must keep records for up to six years after the relevant tax year.

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