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Land of Hope and Tax Waste

Updated 23 November 2022

4min read

Nick Green
Financial Journalist

This year the UK public is set to waste around £4.6 billion in unnecessary tax. A similar figure was frittered away last year. Why is this happening, and is there anything we can do reduce this waste? The unbiased.co.uk and Prudential campaign TaxAction 2016 launches today, in a bid to do just that.


If asked ‘Would you like to pay less tax?’ most of the UK would probably answer ‘Yes.’ However, when it comes to taking simple steps to reduce their tax bill, the same people consistently let themselves down.

Every year UK taxpayers live up to their name – by overpaying several billion pounds worth of tax. Either they don’t make full use of the available tax-free allowances on savings and investments, or they fail to plan their estate properly before death, or more likely both. Consequently in 2016 the British public is set to waste more than £4.6 billion in overpaid tax – and most people won’t even notice.

The 2016 TaxAction report, produced by unbiased.co.uk in partnership with Prudential, has shone a light on the key areas of waste and identified where action is needed.

Where are the biggest areas of waste?manhole-cover-294510_1280

Most of the UK’s tax waste is in the area of pensions; the UK public could collectively save £1.9 billion by contributing more to their pension pots. How do we know this? It’s based on how much the average employee saves into their pension – £2,840 a year, gaining £568 of tax relief in the process. Around 3.4 million adults are currently in employment but not paying into a pension, so if these people did the same, the total tax saved would be that figure of £1.9 billion.

The next largest area of missed opportunity is in the use (or rather, non-use) of cash ISAs. The number of current accounts in the UK is around 65 million, but only 10.29 million people use cash ISAs. This suggests the potential for 54.7 million cash ISAs to be opened, which (based on national average deposits and interest) could save over £1.89 billion through tax-free interest.

Inheritance tax (IHT) comes next on the list. Families could currently save around £595 million more through some simple estate planning. After that we have capital gains tax (CGT) on assets (£208 million overpaid) and on stocks & shares held outside of ISAs (£134 million overpaid). Finally, an extra £2.2 million could be saved in tax if Junior ISAs saw the same rate of uptake and savings activity as was seen with the more publicised Child Trust Funds.

Are we wasting more or less than before?pig-896747_1280

There is good news and bad new here. The good news is that, overall, we are improving: last year’s waste was £4.9 billion, or £300 million more. However, the expected net improvement this year is due to massive progress in just one area – pensions – while in every other area we will actually waste more.

Pensions have been the year’s success story, with a whole £1 billion less tax being wasted. Auto-enrolment and greater uptake of workplace pensions is to thank for this – even though average annual contributions are down, due to the number of new entrants paying only minimum contributions. These figures show what a major role pensions play in reducing tax waste, in that the higher pension uptake has more than offset a poorer showing in all the other areas.

Why are we wasting so much tax?detective-152085_1280

For all that people in the UK care about tax, they seem largely unaware of how much they can do to reduce their own tax bill. When asked about the most important areas of tax for them, most (40 per cent) cited income tax as top, while the two cited as ‘least important’ were CGT and IHT. Yet the unnecessary tax lost to CGT and IHT this year is forecast to be £937 million in total. Why is this loss ‘unnecessary’? Because this tax need not be paid if taxpayers take easy measures such as keeping stocks & shares in ISA wrappers, managing their CGT bill by sharing spouses’ allowances and timing the sale of assets (for example), and planning their estate for their beneficiaries.

Only 18 per cent of UK adults say they have taken any action in the last year to reduce their tax bill. Of those, 47 per cent believed they couldn’t pay any less tax than they do now, while a further 15 per cent said they’d already taken all possible measures. A significant 22 per cent simply hadn’t thought about it.

Plugging the leaksPlumber happy

What can be done to stop unnecessary tax leaking out from the public’s pockets? Much is clearly down to information and education. The widespread inaction over tax mentioned above raises an interesting question. We did see 1.7 million more people take up workplace pension schemes in 2015. If asked, would these people say they had taken action to reduce their tax bill? Many might say no; they might not realise that this is what a pension scheme does. In the end, it’s the complicated nature of tax, and the public’s limited knowledge of it, that results in the widespread wastage. People simply don’t see where they’re losing out or where they might save.

Ironically, the people who currently have cash ISAs have been saving more into them recently, driving the average balance up. This has increased the gap between those who do use cash ISAs and those who don’t, thus accounting for the higher tax wastage this year (up £600 million from last year).

Around a third (36 per cent) of UK adults have a cash ISA but not a stocks & shares ISA, with a third of this sample saying that they considered the latter ‘too risky’. This again may indicate a lack of understanding as to the levels of risk involved, and the close relationship between risk and reward.

In 2016 we will see the introduction of tax-free interest up to £1,000 on ordinary savings accounts. This will be a great incentive to save more – and yet the nation’s tax wastage could actually increase as a result, if people don’t take advantage of it. Nor should people abandon their cash ISAs – for if interest rates rise, then that £1,000 allowance could be used up surprisingly fast.

It’s also worth remembering that many of the new wave of pension savers are currently making minimum contributions. Any increases here would see the tax savings being even greater next year.

The UK is heading at least partly in the right direction, in terms of tax savings through pensions. But it’s high time we caught up in the other areas of tax efficiency, so we can further reduce the annual drain on our finances.

The 2016 TaxAction Report has been produced by unbiased.co.uk in association with Prudential.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.