What a waste of money

TAX PLANNING AND SAVING: three out of four adults pay too much to the Revenue. Here and on pages 18 to 21 we show how to plug the leak

Nobody likes paying tax. The thought that you might be paying more than you have to is particularly galling. But nearly 35 million people will this year pay a total of pounds 5.5bn in unnecessary tax. That is three out of every four adults each paying pounds 158 more than they need.

The overpayment of tax is not part of some altruistic bid to give the government a bit of extra spending money, it is because of financial inertia and a poor understanding of how the tax system works, according to IFA Promotion, which produced the figures as part of its campaign to encourage people to take independent financial advice.

If those figures are not sufficiently alarming IFAP says that because of the introduction of the system of tax self-assessment, 8.5 million people are going to waste an additional pounds 158 in the tax year that starts this April. That means some people will pay pounds 310 more than they should.

Everyone is allowed to arrange his or her own affairs to avoid paying tax where possible. You do not need to get involved in financial wizardry to make sure that you are not one of the three in four adults paying too much tax.

Most of IFAP's total comes from people failing to take simple tax-saving steps. In some cases the Inland Revenue does not even want the tax but it gets collected automatically because people fail to fill in the right forms, forget to claim tax back, or just do not know the options.

More than pounds 1bn, for example, is wasted by the 35 million taxpayers who have long-term bank and building society savings but leave the money in regular accounts instead of tax-free Tessa accounts. Of those people, more than 5 million have not registered to have the interest on their money paid gross, which means 20 per cent is automatically paid to the Inland Revenue.

More than pounds 750m is wasted by people with investments in unit trust or company shares who fail to make use of tax-free personal equity plans. Tax savings on dividends usually exceed management charges, even for standard-rate taxpayers.

Nearly 1.4 million people pay more than pounds 600m to the Inland Revenue when they do not have to because they misuse their "tax-free" personal allowances.

Married couples are some of the biggest losers here. The Inland Revenue did not even answer letters from married women until the mid-1970s and the additional married couple's allowance still goes automatically to the husband. But if the wife pays tax at a higher marginal rate than the husband, the couple could pay less tax between them if they decide to transfer the allowance to the wife

A failure to make proper plans for when you die means that the Inland Revenue picks up pounds 867m in inheritance that could easily have been avoided with a bit of planning. Just making a simple will can save tax and avoid unnecessary complications for your beneficiaries.

Even donations to charity are hit. According to IFAP, the Inland Revenue will keep pounds 119m of tax on money given to charity because the people making the donation did not use the Gift Aid scheme. Any donations above pounds 250 can be made free of basic-rate tax under Gift Aid.

"The amount of money paid unnecessarily to the Inland Revenue each year is staggering," says Robert Browne-Clayton, the chief executive of IFAP. "There is an absolute duty to pay any tax which is levied; but equally no obligation to pay more than is legally due. Paying the taxman more than is necessary is effectively gifting your hard-earned cash to the Exchequer."

The IFAP figures are based on some serious number crunching of the Inland Revenue's own figures by Mintel, the financial analysts. The results give an indication of where the largest amounts of tax are "wasted", though the opportunities to save tax on the individual level depend on your circumstances.

There might be some things you can do to save large amounts of tax but that would be a bad idea for other reasons. Or simple ways to save tax that are peculiar to your situation and would probably only be spotted by a professional adviser.

A single parent with a child to look after, for example, can claim the Additional Personal Allowance, which means pounds 268.50 a year less tax paid.

But in some situations the other parent can claim the tax allowance, too. "If there is more than one child and you can say they live with the father occasionally, the father can claim the allowance as well," says Gerry Hart, a tax expert with the Tax Team, a network of financial advisers. "You would need to show that the child stayed overnight on several occasions throughout the year."

To save even more tax, the father could put in a backdated claim for a maximum of six years. That would add up to more than pounds 1,600.

Even if your "child" is over 18, it is still possible to benefit from the allowance. "Many parents think that once a child has stopped full- time education, that's the end of it," Mr Hart says. "But if they are working under a training contract that lasts at least two years you can still get the allowance regardless of what the child is earning.

"We can do something to reduce the tax bill of a high percentage of people we see for the first time."

It is often the case that the money you will save from talking to an accountant or other professional adviser will cover the cost of his or her fees. But some do not even charge a fee for the initial consultation. IFAP is offering to arrange a free half-hour consultation with local independent financial advisers spread across the country.

q For a free consultation voucher and details of three participating IFAs in your area, telephone IFAP on 0117 971 1177.

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