The end of tax year fast approaches and then at the twelfth stroke at midnight on 5 April each year it is gone and we start all over again. But did you know that in the tax year 2002/2003, nine out of ten people in the UK wasted, on average, £114 each by giving unnecessary tax to the Chancellor? This is likely to be the same again and more for 2003/2004.
Wasting tax can be remedied simply by taking control of your finances, and looking at where you can save tax. Research commissioned by IFA Promotion - an organisation committed to promoting the benefits of independent financial advice - found out where most tax is wasted. The findings were that the UK population wastes:
Nine out of ten adults in the UK - more than 45 million people - will waste a jaw-dropping £4 billion this year in unnecessary tax, equating to an average £114 per person. With these amazing figures we thought that we should publish a summary of a few simple steps that could stamp out much of this tax wastage for good.
Our Tax Saving TipsSavings:
ISAs: Use your £7,000 annual ISA allowance - £110 million in tax could be avoided by sheltering investments in ISAs, or moving savings from an ordinary deposit or savings account to an ISA. Move even just the first £3,000 into a cash mini ISA.
Friendly Society Accounts : Everyone, including children, has a calendar year tax free friendly society allowance of £270. You are allowed to save £25 per month or up to £270 as a lump sum in a Friendly Society Plan with no liability to tax. Parents can save on behalf of themselves and their children and save tax.
National Savings & Investments as additional tax-free savings options. There are many types of National Savings Products to suit people of all ages whether children, working, not working or retired that pay no tax
.Investment Bonds: Up to 5% a year 'income' can be taken from an investment bond with the tax deferred for 20 years. There is no need to declare this an income and if you are a tax payer now - you pay no tax if you are a basic or lower rate taxpayer at the 20th anniversary. This is especially attractive for Higher Rate Tax Payers - who may be Basic Rate Tax Payers in 20 years. It is also attractive for pensioners, as investment bond 'income' below 5% does not reduce the additional personal (age) allowance.
Pensions: If you do not work, have children, grandchildren or are retired (below age 75) consider saving in a Stakeholder pension. These people can have invested for them up to a maximum of £2,808 this year by somebody else. With tax relief of 28p for every £1 saved, the government make this up to £1.28. If you invest the full allowance of £2,808 this gets tax relief of £792 worth making a pensions savings pot with tax relief of £3,600. If you are a member of a company pension plan and earn below £30,000 and are not a Controlling Director, you can save up to £2,808 this year in a Stakeholder pension and claim tax relief even if you are a member of an Occupational Pension Scheme. For every £1 you put in the government will add 28p making it £1.28 Year Highest Earnings : Working people who wish to pay more than £2,808, make sure you use your annual pension contribution allowances. There is no facility to carry unused relief over to future years unless you have an older style pension. You can however select you best years earnings from the last five years.
Higher Rate Tax Payers: If you pay 40% income tax, you are able to obtain up to 40% tax relief on contributions that you make to pensions. This may make the £1 that you pay into a pension £1.66.
Business owners: Pensions can buy and own business assets and property. Why does your business not use a pension fund? Tax relief can be claimed for what is paid into a pension and then it can buy assets. The pension fund pays no tax on gains or growth on the asset. It can even charge you and your business "rent" for the asset thus swelling your pension fund.
Cash Savings: Non Tax Payers and Children: You pay tax on interest received from a Bank or Building Society accounts unless it is in a special tax free account. Make sure you complete a R85 form to ensure that interest is paid with no income tax deducted.
Joint Accounts: If one of you does not pay tax, talk to the bank or building society about only paying tax on the interest on half the amount or better still, change the savings account into the name of the non-taxpayer only. Higher Rate Tax Payers: You pay higher tax on income from savings interest, dividends, unit trusts and many others which is claimed via self assessment. Consider saving in Investment Bonds. Income Tax can be deferred for up to 20 years. In 20 years you may not be a higher rate tax payer and may reduce or completely avoid paying tax at that time.
Children and Adults: A child or adult can receive up to £70 interest per year tax free from National Savings ordinary savings accounts. Why pay tax on interest?Parents: Can make gifts of money into children's savings accounts. Gross interest of up to £100 per parent is allowed to be received on the individual child's savings account that is not taxed as if it were the parents' income.
Grandparents: Gifts to children of money from anybody else other than parents e.g. grandparents. There is no limit on the amount of interest that can be paid which does not affect the income tax position of the person giving the money.
Capital Gains Tax:Allowance: Each year use your gains Allowance of £7,900 (2003/2004). You can realise gains/profits of this amount and not pay up to 40% tax on the gain. Losses: If you have made losses you can offset these against gains or carry them forward indefinitely.
Second Properties : You are liable to CGT on the sale of any second property - with careful changes in ownership of the property and perhaps making it your permanent home for a period - you could slash the tax bill due.
Over 50? Own a share in a business? Business Retirement Relief Allowance (disposing of business assets and getting relief from capital gains tax) is reducing every year and being replaced by Business Taper Relief. The optimum time of getting a mix of the two reliefs is now upon us. If you are looking to pass your business on with the least tax liability consider it now. This relief is running out.
Inheritance Tax:Save £100,000: Adding all your assets together including your home, are you worth more than £255,000? If you are then on death an Inheritance tax bill may be due. Adding a simple clause to your Will can save up to £102,000 in Inheritance Tax. This is called a Will Trust.
Gifting: £3,000 annual gifting allowance. You can make gifts to whoever you choose each year to reduce your inheritance tax bill. You are allowed to carry over any unused allowance for 1 year. So if you did not make a gift last year, you can gift £6,000 this year. You can also give up to £250 to as many other people as you like.
Trusts: Put your life insurance policies in trust. Any benefits on death are paid out more quickly to the people you care about. Using trusts can also reduce an inheritance tax bill.
Tax Returns and Benefits:Self-Assessment Filing : People waste hundreds of pounds each year by not completing their return in time
Tax Code: Check you tax code on your payslip and with your Inspector of Taxes. It is amazing how many people have the wrong tax code that costs them money.
Non-tax payers : Contact the Inland Revenue and ensure that you claim back any tax that you may have paid.
New Children's Tax Credit and Working Tax Credit : These new tax credits which will be paid direct into bank accounts (or via your employer) started on 06/04/03. Have you claimed yours? 9 out of 10 families (even if you don't have children) qualify.
Irregular Income: If you are retired or receive irregular income from pensions, bank and building society accounts and/or investments. Contact your local tax office to see if you are due a refund. You can even go back six years. The Inland Revenue will send you a short form to complete - it can't hurt!
General Tips and Free Fact Sheets: There are literally hundreds of ways to save tax and we cannot cover them all above. Search the sites using the search facility to find what you need or contact us and we will point you in the right direction.
People waste money by not planning or not taking advice. If tax were collected differently e.g. by presenting you with a tax bill of say £10,000 at the end of the year rather than as it is at present then people would take notice and plan more effectively. We have produced a large range of free fact sheets to help users over the last year as well as virtually every topic mentioned above being covered with the relevant websites.
It may be helpful to refresh your memory below and download a copy from the free fact sheets pages if you missed them first time around.