According to research by professional advice website Unbiased.co.uk, each UK taxpayer will waste a massive £440 EACH on average in preventable tax payments.
Karen Barrett, chief executive of unbiased.co.uk, said: "This year's Tax Freedom Day reveals that for 149 days of the year - from January 1 to May 29 - every penny earned by us will be essentially paid to the taxman rather than ending up in our own wallets.
"With so many of us admitting to doing nothing at all to tackle our tax waste mountain, it is not surprising that Tax Freedom Day ends up being later every year! Sorting out your tax affairs can be a quick and simple thing to do.”
Here, we explain how you can cut down on the amount of unnecessary tax you pay each year…
Claim what you’re entitled to
The top area for tax wastage is tax credits, with over £8.5 billion being wasted through people failing to claim their child benefit, child tax credits, working tax credits and pension credits.
Leonie Kerswill, tax partner at accountants PwC said; “Tax credits can make significant sums available even for those on earnings well up the income scale, so it is well worth families checking whether they are entitled to claim these.”
Use tax-free allowances
A massive £509 million every year could be saved in wasted tax if people made use of their annual individual savings account (ISA) allowances.
You can invest up to £5,340 in a cash ISA this tax year and the same amount into stocks and shares, or you can invest the full £10,680 allowance into stocks and shares.
For those looking for a cash ISA, there are plenty of competitive accounts to choose from.
Santander’s Flexible ISA Issue 3 for example, pays 3.30% annual interest on a minimum investment of £1 and you can get access to your cash whenever you want to. This rate includes a 2.80% bonus for the first twelve months, so you will need to move your money after a year.
Other options include ING Direct’s Cash ISA, which pays 3.00% annual interest, again on a minimum investment of £1. This rate includes a 1.96% bonus for the first 12 months.
If you are looking to transfer money over from an existing ISA, then Nationwide’s e-ISA is best for transfers in. You will need to open a card account with Nationwide before applying for the e-ISA, but once you have done this you will earn 3.10% tax-free on your ISA savings. This rate includes a 1.35% bonus fixed until 31 August 2012, so you may want to move your money at the end of this period.
Northern Rock’s e-ISA Issue 2 also accepts transfers and pays 2.80% annual interest tax-free. This rate doesn’t include an introductory bonus and the account can be opened with £1.
Don’t land loved ones with a tax bill when you die
The second highest area of wastage is inheritance tax (IHT), with £1.3 billion being wasted either by making mistakes when it comes to IHT planning or which could have otherwise been avoided by simply putting some basic tax planning in place.
Current UK legislation allows the first £325,000 of your estate to be free from IHT, or £650,000 if you are married, in a civil partnership, or widowed.
Everyone is entitled to give away £3,000 exempt from IHT in any one tax year. If not previously used, then this allowance can be backdated one tax year, so in effect £6,000 could be given per donor to begin with, thereafter £3,000 per annum. Any number of gifts to different people up to a value of £250 each can be made in a tax year.
You can give larger financial gifts, but in order for these to be exempt from Inheritance Tax you must survive seven years from the date of the gift and you cannot have any access to the money you have given away.
Make the most of child trust funds
Around £127 million a year is wasted through people not making the most of Child Trust Funds (CTFs).
The CTF is a long-term tax-free savings account for children born between 1 September 2002 and 2 January 2011. Parents, family and friends can add money to the account up to a limit of £1,200 a year. There is no tax to pay on the CTF income or any profits it makes.
And the money your child gets won't affect any benefits or tax credits you receive, so if you aren’t already making contributions to your child’s CTF account, you should start as soon as possible.
Make pension contributions
The government encourages you to save for your retirement by giving you tax relief on pension contributions. If you're a basic rate tax payer, the tax relief is 20% on the whole of your contribution, and if you're a higher rate tax payer, you get 40% tax relief on your contribution. Those who pay tax at the highest rate of 50% may get 50% tax relief on contributions.
The maximum amount you can contribute to a pension plan, and on which you can receive tax relief, is 100% of your earnings or £3,600, whichever is greater. This is capped at the annual allowance of £50,000 for this tax year.
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