How to pay less tax
1 June 2012
by Harriet Meyer for Standard Life
In these straightened times, why pay tax when you don’t need to? Here are some expert tips to help you hang on to more of your hard-earned cash.
Figures from unbiased.co.uk show that we're handing over an eye-watering £12.6 billion a year in unnecessary tax to HMRC - with the average UK taxpayer wasting an estimated £421 a year.
This includes £2.45 billion in unclaimed tax relief on pension contributions; £403 million in savings held outside an ISA; and £83 million in unused tax allowances1.
To help reduce the amount of tax you pay, David Downie, Senior Technical Consultant at Standard Life, shares some expert tips:
Look at your pay slip or ask your tax office for a coding notice. This details your allowances and any deductions due to state benefits or taxable employee benefits.
If you’re not sure it's accurate, query it. Errors will affect how much you pay, and may result in a large tax demand if you're paying too little. You may be paying too much if, say, you change jobs and your correct tax code isn't used - or if you have more than one job.
You can claim back overpaid tax for up to four years.
Take advantage of your ISA allowance, which rose by £600 to £11,280 from April 2012. Of that, up to £5,640 can be held in cash.
Any growth is tax-free, and in these days of rock bottom interest rates it pays to make your cash work as hard as possible for you, so it's important to use your ISA allowance.
According to Standard Life research2, over a third of Britons who aren't investing in a pension would like to invest an average of around £160 a month into a long-term savings product that 'added an extra £1 to every £4 invested'.
Yet three quarters are unaware that this benefit is already available as a pension plan - because of basic rate tax relief added by the government.
You can also take advantage of the carry forward facility, bringing forward unused allowance from the last three years, the total contribution in the current tax year (2012/13) could amount to as much as £200,000 (including tax relief).
Opting out of your company pension scheme could mean that you are missing out on valuable pension contributions from your employer. If you are offered a pension scheme by your employer, then it is worth considering joining. If your employer makes a contribution to your pension, this is like receiving additional pay. Some employers may even be willing to match the contributions that you make, doubling the amount saved towards your retirement.
Higher rate taxpayers contributing to certain types of pensions could be missing out on half their tax relief, and in some cases could have been doing so for many years.
If you contribute to a personal pension, including a group personal pension or SIPP, your contributions will receive 20% basic rate tax relief on contributions. As a higher 40% or additional rate 50% taxpayer you may be entitled to an additional 20% or 30% tax relief, not paid into your pension scheme, but offset against your income. This additional relief must be reclaimed through your self-assessment tax return.
Those missing out are typically people who do not complete a tax return. This is often because they think their employer is claiming it for them or because they never get around to making a claim. If you earn £50,000 and pay 10% of salary into your pension, not claiming higher rate relief means missing out on £1,000 a year.
Reclaiming missed tax relief is easy, and rebates can often run into several thousand pounds. Like overpaid tax, it is possible to reclaim tax relief for up to 4 previous tax years.
You can also pay too much tax on your savings, as tax on interest is deducted at source. If this has happened, complete a form R40 Tax Repayment Form for each year you've paid too much. A form R85 from your building society or bank will stop future interest being taxed.
Often non-taxpayers fail to either elect to have interest paid gross or to reclaim any overpayment from HMRC. This could result in you paying unnecessary tax and reduces the value of your savings.
Another matter that can affect your overall financial position is tax credits. Around nine out of 10 families with children are entitled to child tax credits and pensioners may be entitled to pension credit. The current full state pension is £107.45 a week, but can be topped up to £137.35 with this.
As with any investment the value of your fund can go up or down and may be worth less than what was paid in. Laws and tax rules may change in the future. The information here is based on our understanding in June 2012. Your personal circumstances also have an impact on tax treatment.
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- Tax Action Report 2012, unbiased.co.uk
- Financial Efficiency research, YouGov for Standard Life, February 2012
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