UK taxpayers are still wasting billions in unnecessary tax by not taking advantage of simple efficiencies, according to research by Prudential and unbiased.co.uk, the UK’s favourite place to find financial and legal advisers. The 2016 TaxAction report has revealed that total tax waste this year could top £4.6 billion. 1
The figure is slightly down from last year’s (£4.9 billion) which is encouraging – but all that improvement has come from a greater uptake in workplace pensions thanks to auto-enrolment. Elsewhere the wastage is getting worse, with low ISA usage and poor inheritance tax (IHT) planning wiping out more than half the £1 billion of savings made by pensions.
To encourage people to take the simple steps needed to save more in tax, the adviser community from unbiased.co.uk has offered up a set of top tips.
Karen Barrett, chief executive of unbiased.co.uk:
‘The substantial drop in tax waste thanks to pension uptake is encouraging, and once again highlights the outstanding value of a pension. Still, let’s be realistic: this improvement is due to auto-enrolment, and many of the new pension scheme members are making only the minimum contributions. It would be great to see some improvement that hasn’t been forced by legislation, but in other areas the public seems to be grow less tax-efficient, not more.
‘The biggest obstacles are ignorance and time: people don’t know what they can do, or they never get around to doing it. It’s here that a financial adviser can help you twice over, firstly by explaining all your options and then doing all the legwork for you. This isn’t about cheating the taxman, but about taking advantage of what’s legally yours. If you’ve never taken advice before, our checklist can help you choose the right adviser for you.’
Les Cameron, tax specialist at Prudential:
‘The most obvious tip is to take advantage of tax-efficient savings vehicles, such as ISAs and pensions, before the end of the tax year on 5 April. Those planning further into the future may also want to make use of the £3,000 annual gifting allowance as this will immediately remove this money from your estate for inheritance tax purposes, regardless of how long you live after you make the gift.
“For those with significant levels of savings, my tip would be to seek out a financial adviser for more tailored advice. An adviser will be able to look at more complex tax wrappers like insurance bonds, perhaps in conjunction with trusts, to help you plan effectively. Likewise, anyone with a sizeable pension pot who is concerned about the reductions in lifetime and annual allowance should seek professional financial advice before making any decisions as this is a highly complex area and there’s no one size fits all answer.’
Financial advisers’ tax tips
Invest in pensions now – ‘We believe that the March Budget may well cut additional and higher rate tax relief from 45/40 per cent to 30 per cent or even 20 per cent, so there is a compelling argument to invest as much as possible into your pension now while the tax relief is so generous.’ – Jonothan McColgan, Combined Financial Strategies Ltd
Use your personal savings allowances – ‘Use your pension and ISA allowances on 6 April 2016 not 5 April 2017 – in other words, sooner not later! If you have unrealised capital gains in your portfolio and have not used your personal allowance, sell holdings up to the personal allowance before the end of each tax year.’ - Simon Webster, Facts & Figures Financial Planners
Consider opting out of pensions – ‘With the pension lifetime allowance falling from 6 April 2016, consider whether you want to opt out of pensions for the future and claim Fixed Protection 2016. I've prepared calculations for one individual with only £500,000 of funds and have recommended that they opt out. Naturally personal situations will vary, but this highlights the need for tailored advice.’ – Alistair Cunningham, Wingate Financial Planning
Rebalance your portfolio to reduce CGT – ‘Use the extra pension contribution allowance (only available as a one-off) and consider a portfolio rebalance while fund values are low, to reduce exposure to CGT.’ – Tony Larkins, Beacon Wealth Management Ltd
Check for tax refunds on lower incomes – ‘In this tax year (2015/2016) there is a tax benefit for those on lower incomes who have savings. All your interest will be tax free if your total taxable income is less than £15,600. You can claim a refund on some of the tax on your interest if your taxable income is less than £15,600 when you don’t include savings interest.’ – Joss Harwood, Eldon Financial Planning
Use cash savings accounts – ‘A revolution in cash savings will see ordinary cash accounts paying interest without tax deducted. Basic rate taxpayers will receive £1,000 of tax-free interest from cash deposits and higher rate taxpayers will be entitled to £500 tax-free. Only additional rate taxpayers won’t have any personal savings allowance.’ - Danny Cox, Hargreaves Lansdown
Take advantage of dividend allowances – ‘All taxpayers from April will have a £5,000 dividend allowance. This means any dividend payments you receive, either from a company shareholding or investments outside of an ISA or pension, will not incur a tax liability up to this level. Anything over £5,000 will be taxed at a rate dependent upon your marginal rate of income tax. A review of your circumstances could be vital.’ – Armstrong Watson Financial Planning
Invest in ISAs –‘£15,240 may be paid into an ISA in this tax year. It is no longer possible to “bed & breakfast” shares to maximise the use of the CGT exemptions, but a “Bed & ISA” will crystallise some of the gain. Married couples may “bed & spouse” to use the CGT exemption!’ - Rowena Griffiths, Female Financial Management
Set up children’s savings plans – ‘If you are worried about IHT, consider setting up regular savings plans for your children or grandchildren. Provided the savings do not materially reduce your standard of living, they would benefit from the “Normal Expenditure out of Regular Income” exemption, meaning that these savings would be free of IHT.’ – Scott Gallacher, Rowley Turton Private Wealth Management
Transfer savings to your spouse– ‘If you work and your spouse doesn’t, or pays tax at a lower tax rate, then you may be missing out on tax savings if you have investment income. You could make tax savings by transferring savings or shares into your spouse’s name or changing the ownership of investment properties, so that the ownership is weighted in favour of your spouse, which means that the income would be too.’ – Gretchen Betts, Broadway Financial Planning
Make charitable donations – ‘Take time to understand your tax position so as to make the most out of tax breaks on pensions and charitable donations. Some key income thresholds to be aware of are:
Jason Whitcombe, Evolve
To search for a whole-of-market financial adviser, visit www.unbiased.co.uk.
Notes to editors:
1 TaxAction Report 2016 has been produced by Opinium Research on behalf of unbiased.co.uk. All figures are based on calculations done on unrounded values to guarantee accuracy; text paragraphs display rounded figures. Survey results come from an Opinium online survey, commissioned by unbiased.co.uk, of 2,006 UK adults aged 18+ carried out between 20th and 24th November 2015.
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