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

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."

7. Miscellaneous

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

Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Engineer / Software Developer

    £40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

    Ashdown Group: Trainee Consultant - Surrey/ South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before