Back tax years could provide nice surprises

In the second of two articles, Anthony Bailey points the way to substantial tax savings

EVER LONGER finance Bills generated by the Chancellor's annual Budget statements are testimony to the complexity of many tax rules. Taxpayers can certainly be forgiven for failing to understand them all properly. A recent official report revealed a high error rate by tax inspectors themselves.

Unfortunately, while those errors meant an element of underpayment of tax, this was eclipsed by the extent of overpayment. So the run-up to the end of the tax year on 5 April is the ideal time to check through tax affairs and, in particular, to do those things that must be done by the deadline date.

Action on investments was the theme in last week's Independent on Sunday. This week we look at other other areas.

Pensions: The 5 April deadline is most pressing for people in company pensions schemes who want to make additional voluntary contributions. Employees who are members of company pension schemes can get tax relief on up to 15 per cent of their pay for pension contributions.

In practice, most company scheme pension contributions amount to between 3 and 6 per cent of pay and some require no contribution at all. The balance of that unused relief can be used as additional contributions either to a scheme run by the employer or to a special kind of pension plan run by insurance companies and others. But payments must be made by 5 April. Unused relief cannot be carried forward to future years.

The position is different for the self-employed and employees who pay into personal pension plans. In this case, the relief is more generous, starting at 17.5 per cent of pay (or net relevant earnings) and rising to 40 per cent, according to age.

It is also possible to use relief from earlier years. A general rule is that personal pension plan holders can go back six tax years, and sometimes further by back-dating premiums. These rules are particularly useful for those who have made little pension provision in recent years but now have a lump sum to invest.

But it is important to act by the April deadline in order to make use of relief dating back to the 1988-9 tax year. The rules make investing a large sum in a personal pension highly tax-efficient, but they are complicated - so it is best to get advice from a pensions specialist.

Reviewing earlier tax years: The principle of going back to earlier tax years extends beyond pensions. For example, there may be unclaimed allowances, such as the additional personal allowance available to unmarried people (including the widowed) with dependent children.

Again, there is a six-year time limit in many cases. But for some things the limit is tighter. For example, the self-employed who want to use business losses to reduce tax bills have several options with limits of two, three and six years. Leaflet IR2B from the Inland Revenue outlines the basic rules.

Married couples: The £l,720 married couple's allowance is automatically given to the husband, but today a wife has the right to claim half - or claim the lot, if her husband agrees.

A desire for equality is reason enough to split the allowance. But there can be practical reasons for giving it all to the wife. For example, if the husband is self-employed while the wife is an employee, the wife can get the benefit of the allowance (and improved cash flow) sooner.

To split the allowance or transfer it to the wife for the coming tax year, tell the tax office by 5 April and complete the appropriate forms.

Company cars: If a company car is essentially a perk and not used for business, it is hard to avoid paying the highest rate of tax on this benefit. But for those who genuinely use their cars for work, the tax bill drops by one third once 2,500 business miles have been clocked up, and by a further third after 18,000 miles.

Anyone nearing either of those figures should see whether any further business use of the car can be made before 5 April. The tax saving could be significant.

Making tax-free gifts: Planning to avoid inheritance tax is a minefield and requires specialist advice. And there is always the danger of giving too much away and being left short.

But some smallish gifts are fairly uncomplicated. In particular, gifts of up to £250 can be made to any number of people each tax year without any inheritance tax implications.

Other gifts, totalling up to £3,000 each tax year, are also tax- free. The £3,000 allowance can be carried forward one tax year. But the first £3,000 of gifts made in the tax year count as using up the current year's allowance. Only gifts of more than £3,000 can use up the previous year's allowance.

q Six more pages of tax planning start on page 11