£12.6 billion – that’s apparently the amount wasted by UK tax payers who fail to take advantage of tax reliefs and benefits. What a staggering figure, and maybe because it’s such a large number it’s just too easy to fail to see how it relates to your personal tax position.
Well, just by taking a few examples you’ll start to see how tax savings can really add up.
- Personal allowances – if you are a married couple with one earning significantly more than the other you may be able to reallocate assets to minimise the amount of tax you pay as a couple. Simple, legal and saves you in tax.
- Tax free savings – each year adults in the UK can invest an amount into an ISA (up to £11,280 in tax year 2012/13). All the income on an ISA is tax free, unlike the income from other forms of savings account. If you have savings outside of an ISA you should think seriously about whether the tax breaks provided by an ISA would be worth having.
- Pensions tax relief - When you pay money into a pension the Government refunds the income tax you paid on your contribution. Effectively, basic rate taxpayers only need to put in £80 to see £100 go into their pot; 40 per cent taxpayers only need to put in £60 to see £100 added. I’ve said it before (Forget paying off your mortgage, pay into your pension) but where else can you get such a great return on your investment?
- Inheritance tax - the first £325,000 left in any estate is available free of tax to be distributed to the beneficiaries. The Government takes a whapping 40% in tax on any assets over this level. There are things you can do to avoid this, with proper inheritance and estate planning.
- Tax efficient profit extraction for Directors – not for everyone I appreciate but for business owners and directors - by carefully structuring your holding in your company, taking dividends from profits rather than salary or looking at ways to contract your services to your business you can significantly reduce the amount of tax you pay, in some case seeing a drop from a rate of 50% down to 20%.
Apparently a staggering 85% of Brits do nothing to reduce the amount of tax they pay each year. Is that because they don’t know how they can save or for other reasons? I’d love to know, or better still to help those that don’t want to pay any more in tax than they really have to.
Chartered Accountant and Chartered Financial Planner, Birmingham