Research published recently by IFA search website unbiased.co.uk has shown that UK tax payers are set to pay £4.9 billion more in tax than they need too.
This is up£200m from last tax year. The tax waste is spread across four main areas: capital gains tax, inheritance tax, lost pension allowances and lost ISA allowances.
The research uncovered that £550m of inheritance tax was wasted this tax year by people not placing their life assurance in trust. A trust can reduce inheritance tax by £40,000 for every £100,000 of life assurance, assuming that an individual has assets worth more than £325,000.
The research also showed that this year £157m will be wasted in unnecessary capital gains tax payments. We have an annual tax-free capital gains allowance of £11,000 and this is lost at the end of the tax year if it isn’t used. Lower-rate tax payers will pay tax at 18 per cent on amounts over this allowance and higher-rate tax payers will pay 28 per cent tax.
Failing to fully use the £15,000 annual ISA allowance is a common reason for unnecessary capital gains tax. Not using it also wastes an estimated £1.2 billion in income tax. This is split between tax on interest in cash accounts and higher-rate tax on share dividends. Both of these would be tax-free inside an ISA.
Finally, the research showed that £2.9bn of tax relief is going unused with pensions. Tax relief is 20 per cent for non-taxpayers and basic-rate tax payers, 40 per cent for higher-rate tax payers and 45 per cent for additional-rate taxpayers.
There are also some taxpayers who earn between £100,000 and £120,000 who will effectively receive 60 per cent tax relief.
Higher-rate taxpayers must remember to claim the extra tax that is owed to them.
The calculator at www.unbiased.co.uk/tax-waste-calculator is a useful starting point to check how much tax you are wasting each year.
David Hill is a Chartered Financial Planner and Trust & Estate practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org