Don't give too much money to the taxman
Experts insist many of us are paying far too much tax – as much as £148bn too much – but Rob Griffin lets us in on some of the legal, straightforward ways to keep more cash in your pocket
Saturday 08 October 2011
Every penny we earned during the first five months of this year effectively went to pay government levies – but millions of people in Britain could have saved a fortune by indulging in some completely legal and relatively straightforward tax-planning techniques.
The Treasury expects to rake in £589bn in the current tax year with income tax (£158bn) and national insurance (£101bn) among the most lucrative.
But tax experts and independent financial advisers insist many people are actually paying far too much tax with Unbiased.co.uk, the professional advice website, estimating that £148m alone will have gone out in unnecessary capital gains tax payments.
Such figures illustrate how much there is to do when it comes to protecting our income and assets, according to Karen Barrett, the site's chief executive, who points out that a bit of planning can result in all of us having considerably more money in our pockets.
"Making use of tax-efficient strategies can make a huge difference and it's important for people to think about how they can make the most of their allowances – which so many taxpayers waste each year – as well as reducing their liability," she says.
1. Check your tax code – and claim what you're due
This has to be your first step. Check with the Inland Revenue to make sure you are on the right tax code and get in contact with your local Citizens Advice Bureau to see if you are receiving the full range of benefits to which you are entitled.
2. Income Tax
Husbands and wives (as well as civil partners) are taxed independently so each will have their own personal allowances and subsequent bands. Therefore, if one partner has a different tax rate to the other it's worth considering moving assets to the lower tax payer to reduce the overall tax burden, points out Geoff Penrice, an independent financial adviser with Honister Partners.
He cites the example of a couple, one of whom is a non-tax payer and one that pays the higher rate. "If they have £100,000 on deposit paying three per cent interest – £3,000 a year – this would be subject to 40 per cent tax in the higher taxpayer's name, which would be £1,200," he says. "If this was transferred to the non-taxpaying partner this would reduce to zero. If they had sufficient capital it is possible for them to save around £17,000 by rearranging their finances."
3. Capital Gains Tax
You can realise up to £10,600 of gains this tax year without having to pay capital gains tax. So if, for example, you have an investment portfolio containing gains of more than that amount consider selling investments to strip out gains within this year's allowance, says Justin Modray, founder of website Candid Money. "Doing so could reduce the amount of tax, if any, you end up paying in future," he says. "If you wish to repurchase the same investments you'll have to wait 30 days, but you can purchase other investments straight away."
If you're married or in a civil partnership, don't forget to use your partner's allowance, too, says Mr Modray, as you can transfer assets to them free of tax, which they can then sell to realise a gain within their allowance.
"Anyone that has realised a loss, either this year or previously, can offset it against any gains," he adds. "Unused losses can be carried forward indefinitely, but you must inform HMRC of the loss within five years from the 31 January after the tax year in which the loss occurred."
4. Individual Savings Accounts
Individual Savings Accounts (ISAs), which were introduced by the Labour Government back in 1999, should be a priority for anyone with money to save because they are the simplest way to make money without sharing any profits with the Treasury.
ISAs can be split into two distinct camps: cash ISAs and stocks & shares ISAs. Cash ISAs are basically tax-free savings accounts on which interest is paid on a regular basis. Stocks & shares ISAs, meanwhile, invest in assets such as open-ended investment companies and investment trusts. As they are exposed to stock markets, the value of investments can rise and fall.
It is important to make sure you use your ISA allowance wherever possible, even if you only have cash savings, advises Patrick Connolly, head of communications at AWD Chase de Vere. "You can currently invest up to £5,340 each year into a Cash ISA and this will mean that all interest is tax-free and it doesn't need to be declared on your tax return," he says. "You should also look at using your stocks and shares ISA allowance into which you can invest up to £10,680 each year (although this includes whatever you invest into a Cash ISA). ISAs are particularly tax efficient for higher-rate taxpayers and often for fixed interest rather than equity investments.
5. Pension benefits
Pension contributions benefit from income tax relief – a £100 contribution costs a 20 per cent taxpayer £80; a 40 per cent taxpayer £60 and a 50 per cent taxpayer £50 – and this makes them particularly attractive, according to Justin Modray at Candid Money.
"If you belong to a company pension scheme then contributions are usually made directly from your pay before tax, so you enjoy the full benefit straight away," he says. "Otherwise basic-rate tax relief is given automatically at source while higher-rate taxpayers can deduct the additional higher-rate tax from their tax bill. You can invest up to your annual earnings, subject to a limit of £50,000."
It can be even more tax efficient to make pension contributions through your employer using salary sacrifice, according to Patrick Connolly at AWD Chase de Vere. "This is a contractual arrangement where you give up part of your cash remuneration and in return receive an equivalent value of non-cash benefits," he explains. "Pension contributions through salary sacrifice benefit from tax relief at source on contributions, no National Insurance payments on contributions and the possibility that your employer may boost the pension contribution by adding part or all of their National Insurance saving.
6. Inheritance tax
Your first task should be to write a will. This may not save inheritance tax on its own but it will force you into working out exactly what assets you will leave behind. This list can include everything so make sure to factor in the threats to your life such as the cost of long-term care.
When you have a total figure, compare it to the estimated value of your assets – remembering to add in your house, savings and investments – to provide an estimate of what you may end up leaving to friends and family.
If this figure is over £325,000 – the current threshold – then it is time to think about getting your assets out of reach of the Treasury's grasp.
There are plenty of allowances around IHT that are not being utilised, points out Geoff Penrice at Honister Partners, including a £3,000 annual gift allowance and gifts out of income. In addition, there are some very useful trust options for tax planning purposes.
"I like 'Discounted Gift Trust', which allows someone to gift capital into a trust – such that the capital falls out of their estate after seven years – but enables them to still receive an income for life," he explains. "This is particularly useful when someone has surplus capital, which they will not need, but requires access to the income which the capital produces."
There are also Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) – but these aren't for everybody, warns Mr Connolly. "Investors get a range of benefits – including 30 per cent initial income tax relief – but they are usually risky investments so there is a danger you could lose more than you gain," he says. "Such products are therefore only usually suitable for wealthier investors who already have other investments in place."
Enterprise Investment Schemes, says Mr Modray, "are similar to VCTs in that your money must be invested in very small companies, but arguably even higher risk as your money is invested in the shares of single companies rather than a fund.
"An income tax rebate of 20 per cent is given on investments of up to £500,000, provided the shares are held for at least three years."
Higher-rate taxpayers who would rather give money to charity than the taxman should consider making a donation, adds Mr Modray. "When you make a donation through the Gift Aid scheme the charity can reclaim basic rate tax," he explains. "You can then reclaim the additional higher rate tax via your return. For every £100 donated a higher rate taxpayer can reclaim £25."
Tax freedom day
* Britons worked 149 days to pay their taxes in 2011 – three days longer than in 2010. However, there are regional differences with Londoners having to work the longest to pay off their income tax burden (151 days) while the Welsh spend the least time paying their income tax (135 days).
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Customers paying up to £250 more on energy bills than they should every year
10 tips for taking out a personal loan
Has your Premium Bond won the £1million jackpot?
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 What happens to your body when you give up sugar?
- 2 Japanese island overrun with cats after population explodes
- 3 Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
- 4 Have sex with your iPad thanks to the new sex toy no-one asked for
- 5 Average penis size revealed: Scientists attempt to find what is 'normal' to reassure concerned men
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Ukip would cut billions from Scottish budget to fund English tax cuts
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
iJobs Money & Business
£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...
£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads