Today is Tax Freedom Day! The theoretical date at which the average earner will have paid all of their taxes leaving the rest of their earnings available to spend on themselves. Simon Torry explains.
Have you ever wondered just how much you pay to the government in taxes? Your P60 will show how much you’ve paid in income tax, but what about all the other taxes you may have paid such as VAT, fuel duty, council tax etc.?
“In other words, the UK tax payer spends almost five months working for the government”
At the Adam Smith Institute they’ve been calculating the total annual tax paid by the average earner since the mid ’60s and now publish the results annually. ‘Tax Freedom Day’ is the theoretical date at which the average earner will have paid all of their taxes leaving the rest of their earnings available to spend on themselves.
You probably won’t be surprised to know that ‘Tax Freedom Day’ has been slowly moving its way along the calendar, with this year’s date landing on 28 May. In other words, the UK taxpayer spends almost five months working for the government. If we include the cost of borrowing then the picture gets much worse, with the date moving to the beginning of July.
So why is this happening? Well, one reason is that the government now faces the growing cost of funding the welfare state, improvements in medical science and a healthier lifestyles means that life expectancy in the UK is increasing. As an example, average life expectancy in the early ’60s was around 70 years, this has now increased to around 80 years today, with the trend set to continue upwards. Of course an increase in life expectancy is to be welcomed, but there are some significant financial implications, with spending on pensions and healthcare now becoming a considerable burden to the taxpayer.
So can anything be done to alter your ‘Tax Freedom Day’ for the better? unbiased.co.uk is encouraging everyone to take TaxAction by making the most of their tax reliefs. Assuming that we stick to those things approved by HMRC then there are several legitimate schemes an individual can take advantage of to reduce their tax bill. The first place to start is to check the basics, for example are you on the right tax code and claiming the correct allowances. If you’re married or in a civil relationship and your partner is a non-tax payer have you arranged your affairs in such a way that the assets that produce income are held in your partner’s name.
Listed below are a few things that may help reduce your ‘Tax Freedom Day’, but as always, if you’re unsure about your situation and what you should do, then you should seek professional advice.
Married couples’ allowance – This year, the government reintroduced the married couples’ allowance (also applicable to civil partners), which can reduce an individual’s tax bill by up to £816.50 per year. If you’re eligible you’ll need to complete the appropriate section in a Self-Assessment tax return, if you don’t then you won’t receive it.
Capital gains tax allowance (CGT) – unbiased.co.uk TaxAction research revealed that we’re wasting £154 million in unnecessary CGT payments this tax year. Making use of your annual CGT allowance can save you from a nasty surprise on the eventual sale or gift of an asset. If you’re a higher rate taxpayer, and assuming you don’t require additional income, then selecting investments that produce no or little income should be considered. If this can’t be avoided then perhaps holding your investments within a product such as an Onshore or Offshore Bond may be appropriate.
ISAs – The TaxAction research also found that, as a country, we’re wasting £1.1 billion by not putting our savings into ISAs. From July this year the government will be increasing the annual ISA allowance to £15,000. Although interest rates are low at the moment it still pays to keep your savings sheltered in an ISA. Moving savings from taxed deposit accounts to a tax free ISA may pay dividends in the long term.
Pensions – Pension contributions attract tax relief at an individual’s marginal tax rate and can therefore be a great way of reducing your tax bill while at the same time building a fund for the future. And with the Chancellor’s budget announcement to permit full access to the savings pot at any time after age 55, pensions are now worth some serious consideration.
About the author
Simon Torry is a chartered financial planner and CEO at SRC Financial Services. His specialist areas include retirement planning, tax mitigation and wealth management. He is a member of the Institute of Financial Planning and the Chartered Insurance Institute as well as an associate member of the Personal Finance Society.
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.