UK taxpayers missing out on £2.9 billion of pension relief
UK taxpayers are overpaying billions of pounds in tax by not taking advantage of the tax reliefs available to them, with pension relief accounting for the largest share.
According to a report issued by Prudential and unbiased.co.uk, UK taxpayers are set to pay an extra £4.9 billion in tax in 2015 - up from £4.7 billion in 2014 - by not taking advantage of pension reliefs; Isas; and inheritance tax (IHT) and capital gains tax (CGT) breaks.
The report claims that this equates to an average of £165 per individual taxpayer, up from £161 last year.
Wasted pension relief accounts for over half of the total, with taxpayers losing out on £2.9 billion by either not paying into a pension or not claiming back their reliefs from HMRC. According to unbiased.co.uk there are currently 4.2 million adults in the UK who are not saving into a pension.
Les Cameron, tax specialist at Prudential, comments: "Busy lives and ever-changing tax rules mean that tax planning may not always be at the top of many people's to-do lists. But by failing to plan efficiently, many of us are simply not maximising the available value of our hard-earned savings."
The research shows that £1.3 billion is also being lost in unused cash and stocks and shares Isa allowances, £1.2 billion of which is due to a failure to use cash Isas, and a further £104 million through stocks and shares investments not held in Isas.
Around £550 million will also be wasted in IHT as people fail to put their life insurance policies into trust before their death, while £158 million is being lost in CGT, again, due to the failure of individuals to use Isas to shelter their investments from tax.
Karen Barrett, chief executive of unbiased.co.uk, says: "Millions of UK taxpayers are putting their money into taxed saving and investment products, when there are substantial reliefs, allowances and better rates readily available.
"Changes to tax legislation, as well as the new pensions freedoms, make it seem less stressful to take no action, but there are simple steps that will make a real difference to your finances."
This article was written for our sister website Money Observer
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
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.
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.