Brits waste £9.3 billion in unnecessary tax
Around £9.3 billion is wasted each year in unnecessary tax, costing each of us an average of £183, new figures reveal.
Analysis of Inland Revenue and other official data – by research firm RAKM – shows that the amount we pay in unnecessary tax has risen by 14% from last year, with 82% of people admitting they have done nothing to reduce their tax payments.
According to the Adam Smith Institute (ASI), 2 June is Tax Freedom Day – the day we stop working for the government and start working for ourselves. This means that every penny earned in the first 155 days of the year is taken by the taxman to support government spending. This includes income tax and national insurance, as well as VAT, fuel duties and alcohol tax.
The ASI claims that if public spending had only grown in line with inflation since 1997, then income tax, corporation tax, capital gains tax and inheritance tax could have been abolished by now, leaving the taxpayer £200 billion better off.
In 1963, 24 April marked the first day in the year when the average person had earned enough to pay their taxes.
David Elms, chief executive of unbiased.co.uk, which commissioned the RAKM research, says that there are a number of measures people can take to reduce their tax burden, some of which can be taken today and others which may require the help of an independent financial adviser.
He adds: "Tax Freedom Day is a key date in any UK taxpayer's diary as it highlights just how much time we spend working for the taxman each year. By taking tax action now and ensuring that your finances are as tax efficient as possible you can move your personal tax freedom day to earlier in the year and reduce your tax burden as well."
Three ways to reduce your tax burden from home:
1. Using your ISA allowance is one of the simplest ways to reduce your tax burden. Everyone over the age of 18 has an annual allowance of £7,200 this tax year (2008/09) of which £3,600 can be deposited in a cash ISA.
An ISA should be the first home for your savings, but if you have used your allowance you could also consider a tax-efficient savings account from a Friendly Society or National Savings & Investments.
2. If you are eligible to claim tax credits then don’t put off doing so. Elms estimates around £3.7 billion of cash is up for grabs from Revenue and Customs and the Department of Work and Pensions in the form of pension credits, child tax credits and working family tax credits. You can find out if you're eligible by contacting HMRC on 0845 300 3900. Details are available online at taxcredits.direct.gov.uk.
3. Finally, Elms says as much as £474 million goes begging each year, £330 million through non-taxpayers failing to claim tax back on banks and building society savings accounts. A further £144 million is wasted by taxpayers not transferring savings accounts to non-taxpaying spouses, so that the tax liability on the savings is lower.
For more ways to reduce your tax burden read our guide to getting your own back on the taxman.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.