Updated 25 July 2017
You could try funnelling your income through a labyrinth of offshore companies… or you could just open ISAs, pay a little bit more into your pension and take a few other simple measures. Believe it or not, reducing your tax bill can be dead easy, and it doesn’t have to risk the wrath of HMRC.
This week’s big tax news was that Google has agreed to pay £130 million in back taxes after years of paying too little. What you might not have heard is that UK taxpayers are set to save more than twice that amount this year by taking some clever measures of their own. The difference is, these tax-saving measures are actively encouraged by the UK government – but the nation still isn’t using them nearly enough.
Google came under the spotlight some years ago due to the way the company had structured its tax affairs. In 2013 the company paid just £20.5 million of tax, though its UK profits were just under £4 billion. These look like huge figures – but before we start pointing fingers at the big corporations, consider this: this year UK taxpayers will pay an estimated £4.6 billion more tax than they need to. Yes – our unnecessary tax bill is more than Google’s entire 2013 profits.
Hang on – didn’t you just say we were saving tax?
Compared to last year, yes we are. In 2015 the UK public overpaid some £4.9 billion of tax, so this year we see a clear improvement of £300 million. However, we shouldn’t congratulate ourselves just yet. In most areas of tax efficiency, we’re actually doing worse than ever.
So are many people (that’s part of the problem). It comes down to the reasons why we’re overpaying tax. Every UK taxpayer has a number of tax-saving allowances, covering income tax on savings and investments, capital gains tax on assets that increase in value, inheritance tax on legacies, and the amount of tax relief we can receive when we pay into a pension. Obviously, not everyone can use all of these to the maximum (because they may not have that much money available to save). Still, a great many people are not using these allowances as much as they could.
What are we doing wrong?
Here’s an example. The latest research* by unbiased.co.uk estimates that around a million UK households are holding stocks and shares outside of an ISA, which means the growth on them is subject to both capital gains tax and income tax. If these investments were moved into ISAs, then based on the average holding of stocks and shares currently held in ISAs (£6,595 per household) this would amount to a total tax saving of £134 million.
Cash ISAs are another case in point. Some 54 million people hold current accounts but won’t use a cash ISA this year. Based on just the average annual cash ISA deposit, if all of these people saved into a cash ISA this year, they could save a collective £1.8 billion.
Similar mistakes are being made regarding inheritance tax and capital gains tax – people aren’t planning properly to make full use of their allowances in those areas.
So what did we just do right?
This year an estimated 1.7 million more people are members of workplace pension schemes, thanks to auto-enrolment. Together they will save an extra £1 billion in the form of tax relief on pension contributions. However, because the UK’s tax efficiency has become worse in other areas, the net saving will be only £300 million.
And we could do MUCH better even here
In just the area of pensions, we are still as a nation paying £1.9 billion more tax than we need to. How do we know this? Because despite auto-enrolment, there are still around 3.4 million adults currently in employment but not paying into a pension. If these individuals were to pay, on average, the current mean pension contribution of £2,840, this would save £568 per individual. Of course, if the average pension contribution were to rise, this saving would increase by even more.
Reducing tax is easier than you think
There have been many grumbles in the media about mega-corporations paying lower tax by using convoluted arrangements and clever accountants. But the fact is, trimming one’s personal tax bill can actually be very simple. Even better, the government won’t get cross with you for paying more into your pension or using your ISA allowances – or even arranging your estate so that your children pay little or no inheritance tax when you die. All of these are perfectly sound and simple arrangements that anyone can make.
To find out what you could do to reduce your tax wastage, download our free Tax Waste Trimmer.
* TaxAction 2016 research by unbiased.co.uk