UK taxpayers waste £4.6 billion in unnecessary tax
Filed under: Tax
There are four ways we should all be bringing our tax bills down - without suffering the fate of Jimmy Carr.
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The study, by unbiased.co.uk and TaxCalc 2013 Tax Action, found that the average taxpayer is paying £153 too much every year. The experts behind the study suggested four ways in which we are wasting our cash - and proposed sensible solutions.
1. ISAsSome 30% of all overpaid tax comes from the fact that we're not taking advantage of our ISA allowances. No-one is getting a fortune in income from their cash savings at the moment, but the little we do get ought not to be taxed.
The study showed that we're wasting £311 million in interest on savings (as well as almost a billion in not having the better interest rates that tend to be paid on ISA accounts). The research also reveals that a further £1.3 million is being wasted, because we're not signing up for the Junior ISAs we are eligible for.
We're also missing out on tax breaks from stocks and shares ISAs. Around 1.6 million of us keep stocks and shares outside an ISA at the moment. If we converted these into ISAs, we could save £62 million.
It's vital, therefore, that we look at our savings and investments, and move our full allowance into an ISA each year.
2. PensionsThe research shows that nearly 4.3 million people (not currently paying into a pension but who would potentially consider it) are currently leaving £2.6 billion of income tax relief on pension contributions unused.
If we paid in the average annual contribution of £3,010, we could boost our pension pot by as much as £602 each and £2.6 billion collectively, simply by taking advantage of tax relief on pension contributions.
3. Capital Gains TaxWe could be wasting as much as £171 million in unnecessary capital gains tax (CGT), by not making use of tax efficient strategies and allowances.
You have to pay CGT when you sell assets that have increased in value - like shares or second properties. At the moment we all have an allowance each year of £10,600. Any gain above the allowance is charged at 18% for lower and 28% for higher rate tax payers.
A great deal can be saved purely by timing any sale to take advantage of your allowance over a number of years. Alternatively there are a number of ways of using ISAs for this, not least ensuring that any shares are held in an ISA from the outset.
4. Inheritance taxA bit of planning could save £472 million in inheritance tax - which is taxed at an incredible 40% on anything you own worth more than £325,000.
There are a couple of simple steps. The first is that if you have taken out life insurance, you should place it 'under trust', so it doesn't count as part of your estate.
If you have the assets to spare, you can also take advantage of annual gifting limits, giving cash away as you go along rather than saving it up for a bumper payout and spending a fortune on tax instead.
Karen Barrett comments: "The message is clear - take time to understand your tax position, make the most of tax reliefs and allowances available to you and ensure that you are being as tax efficient as possible."