Cash-strapped Brits are set to unnecessarily hand over a massive £13.5 billion to the taxman this year, according to unbiased.co.uk’s 19th annual Tax Action Report1. This is a huge amount in a year where cuts to public spending and benefits will put even more pressure on our already tight purse strings.
The Tax Action Report calculates how much money is wasted as a result of people making mistakes with their personal finances, resulting in them paying more tax than needed. The report also looks at how much tax people could have avoided paying by planning and reviewing their finances in a tax efficient way.
The number one area of tax wastage is through tax credits, with over £8.5 billion being lost through people failing to claim their child benefit, child tax credits, working tax credits and pension credits. The second highest area of wastage is through inheritance tax, with £1.3 billion being wasted through error or which could have otherwise been avoided with some basic tax planning in place.
Despite the increase to Britain’s tax waste mountain this year, a massive 88% of people state they have done nothing in the past 12 months to reduce the amount of tax they pay, rising to 91% of females4. This has increased from 86% of people last year who did nothing to reduce their tax burden5.
Shockingly, of those who have not taken any steps over the past 12 months to become more tax efficient, 45% state that was because they believe they are already being as tax efficient as possible. However, these new Tax Action stats reveal otherwise. Over a quarter (28%) of people don’t know how to go about being more tax efficient and one in ten (12%) simply don’t know why they haven’t taken steps to reduce their tax liability.
The Tax Action report reveals that the South East (including London) is the UK’s tax waste capital, with over £3.5 billion wasted in tax - £1.7 billion of which is wasted in London alone. But it is not just the South that is wasting tax on a large scale; the North West accumulates a whopping £1.5 billion in unnecessary tax payments alone! On the other hand, Northern Ireland has the lowest tax wastage with only £379 million being wasted.
Karen Barrett, Chief Executive of unbiased.co.uk comments, “Our 2011 Tax Action Report reveals that a massive £13.5 billion is being wasted by consumers through apathy and avoidable circumstances this year. Significant amounts are being wasted across all of the tax categories which could so easily be avoided by people taking action and putting some basic tax planning in place. While consumers are increasingly aware of saving money by switching utilities provider or using online moneysaving websites, they could actually be saving themselves even more by being tax efficient and not giving away more than they should to the taxman.
“The start of 2011 has certainly seen a continuation of tough economic circumstances, therefore it is vital for everyone to look at their finances to make sure they’re not throwing tax money away unnecessarily. A key way to do this is taking advantage of the tax incentives, reliefs and credits available to each person - and to avoid over paying tax.
“Tax can seem a complex issue for many, and even more so in the current economic environment as people look closely at their finances. An independent financial adviser can advise on your financial position and ensure that you are being as tax efficient as possible. Everyone should take Tax Action now and save money, so hopefully we can see the annual UK tax wastage start to decrease. To find a local IFA near you, visit unbiased.co.uk and use our free and confidential ‘find an IFA’ search.”
Basic and advanced tax saving tips from unbiased.co.uk's IFAs
Basic tax tips:
Use your partner’s income tax rate – Jaskarn Pawar, Investor Profile
“If you are about to sell an investment that has performed well for you, but has taxable gains on it, then try to transfer it to your partner’s name. If your partner is in a lower income tax rate band than you are e.g. if you are in the higher rate and your partner is in the lower rate, then selling the investment under their name will reduce or eliminate your tax bill. A stock transfer for shares and funds, or an assignment for investment bonds, is usually a very simple admin exercise.”
Avoid extra taxes – Harry Katz, Norwest Consultants
“If you buy the latest Saab you won't have to pay Vehicle Excise Duty. If you have an electric car or the very lowest emissions band you will also save on the congestion charge in London
“Hard pressed for cash? Have a spare room? Then why not consider Rent a Room. Provided you receive (after expenses) no more than £4,250 per year this is tax free. That's almost £82 per week in your pocket.”
Play the pension tax relief system – Jason Witcombe, Evolve Financial Planning
“To get the most out of your pension between now and retirement, be clever about contribution levels and review this decision each year. If your income is in the 20 per cent tax band, it will cost you £8,000 to get £10,000 into your pension after basic rate tax relief. Higher rate tax starts at £43,875 for 2010/11. Therefore, if you wait until your income is £53,875, getting £10,000 into your pension only costs you £6,000 as you get 40 per cent relief.
“Therefore, if you are a 20 per cent taxpayer now but anticipate a pay rise in the next few years, maybe you should delay pension contributions? Perhaps your focus could be paying down your mortgage or saving into ISAs in the meantime? The figures are even more pronounced for people with incomes of just over £100,000. If you expect to cross one of these barriers, or have income that fluctuates, making an active decision on pension contributions each year can make a huge difference to the value of your future pension.”
Use your ISA allowance – Danny Cox, Hargreaves Lansdown
“Sheltering your existing savings and investments from tax will improve your returns, in some cases by as much as 50%. An ISA is not an investment itself but a tax efficient wrapper. The investments in an ISA are free from capital gains tax and there is no further income tax to pay. This tax year, which ends at midnight on the 5th April, you can invest £10,200 in ISA of which £5,100 can be cash. From the new tax year, which starts on the 6th April 2011, you can invest £10,680 in ISA or which £5,340 can be in cash. This means during April a couple could shelter as much as £41,760 in an ISA.
“But don’t worry if you can’t save the maximum. Regular savings ISAs start from £50 per month and cash ISA from just £1. Finally if you are investing in stock market ISAs, use a fund supermarket. This is usually the cheapest and easiest way to invest, plus you can value your ISA online 24 hours a day, 7 days a week.”
Use your capital gains tax allowance – Gordon Bowden, Quainton Hills Financial Planning Ltd
“The last couple of years have seen most people’s share portfolios increase in value. Everybody has an annual Capital Gains Tax (CGT) allowance of £10,100. Gains realised of up to this amount are tax free. CGT applies to a wide range of assets and individuals should consider taking gains to use the allowance each year.”
Children’s capital gains tax allowance - Kevin Tooze, Equity Partners UK Ltd
“Parents who have school or college age children often overlook the capital gains tax allowance their children can use. For example a child can hold a growth OEIC or unit trust and make gains of up to £10,100 in one tax year and not be subject to any tax on the proceeds if realised.”
Advanced tax tips:
Tax Wrapper Selection – Daniel Clayden, Clayden Associates Ltd
“Making sure that you select the correct tax wrapper for your savings and investments is now probably more crucial than ever. Currently we see a regime where individuals may be liable to income tax at the ‘additional’ rate of 50%, personal allowances are reduced if income exceeds £100,000 and for higher rate tax payers capital gains are now taxed at a rate of 28% – which is now even more likely as we see the basic rate tax band being reduced from April. So if you don’t choose the most appropriate tax wrapper you’ll probably end up paying more tax than you need to ... and no-one likes doing that!
“A review with a suitably qualified IFA can help ensure that you are holding your savings in the most appropriate wrapper for your particular circumstances. For example, good planning can help you to take full advantage of your personal allowance - from 6th April 2011 a couple using both personal allowances can between them receive the first £14,950 of their combined income effectively tax-free.”
Tax efficient mortgage - Peter McGahan, Worldwide Financial Planning Limited
“If you are thinking of a buy to let mortgage or have one, remember that any mortgage you take out is tax deductible against the rental income. So if you took out a mortgage against your own home, then put that against the deposit for the new house, both mortgages would be offset against the rent. All too often we see the entire mortgage raised against the buy to let property when indeed the cost of borrowing there would have been considerably cheaper against their main residence. So, raise as much as you can against your main home then the rest against your buy to let property which will drive the interest rate downwards there. Then, when you are doing your tax return, you apply both mortgages against the rent.”
Structure your portfolio – John Lang, Tower Hill Associates Limited
“Many investors with an investment and ISA portfolio can increase their after tax returns without changing the assett allocation of their portfolio by following these simple tax planning and portfolio structuring tips:
1. Tax Action Report 2011 has been carried out by Purple Market Research on behalf of unbiased.co.uk
2. Error waste: refers to that tax, which is only paid as a result of consumer’s error or omission – much of this can be reclaimed, once the individual has identified the waste.
3. Avoidable waste: is the estimated amount of tax which individuals could save if they made changes to the way in which they manage their finances. Savings can either be made by simply changing the product used to a more tax efficient alternative or by changing the way in which the money is managed. (These two waste areas are added together to show a total of wasted opportunities – an indication of the extent to which individual taxpayers lose out).
4. Additional research conducted online by Opinium Research among a sample of 2,019 UK adults between 11 and 14 February 2011. Data has been weighted to nationally representative criteria.
5. Additional research conducted online by Opinium Research among a sample of 2,065 UK adults between 16 and 19 February 2010. Data has been weighted to nationally representative criteria.
Anna Schirmer/Anna Moulds/Emily Falla, Lansons Communications: 020 7294 3682
For expert commentary or case studies from over 150 media-friendly IFAs, journalists should visit www.unbiased.co.uk/bluebook.
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