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Britain may now have a hung parliament, but on May 30th taxpayers can raise a toast to Tax Freedom Day*, the notional point in the calendar year when we stop working for the taxman and start working for ourselves.
However, research from unbiased.co.uk, the professional advice website, reveals many consumers will regard this alleged ‘tax freedom’ as bittersweet - with nearly a third (31%) predicting substantial post election tax hikes.
It's three days later this year
Tax Freedom Day, calculated by the Adam Smith Institute, falls three days later this year than in 2009, largely because of the increase in VAT from 15% back up to 17.5% at the beginning of the year.
And as tax continues to be a key topic on the news agenda, unbiased.co.uk’s latest Tax Action report reveals Britain’s annual tax wastage this year is set to be a whopping £9 billion, due to squandering tax breaks, reliefs and credits and paying fines for late or inaccurate tax returns.
But despite this huge tax wastage sum and predictions of tax hikes, a massive 86% of Brits still admit to doing nothing to reduce their tax burden.
Karen Barrett, Chief Executive of unbiased.co.uk commented “This year’s Tax Freedom Day reveals that for 149 days of the year – from January 1 to May 29 – every penny earned by UK residents will be taken to pay for government spending.
However, it has also been highlighted that this year’s Tax Freedom Day could be viewed as misleading - as it is only based on tax receipts and doesn’t takes into account the government’s budget deficit. This means, once the budget deficits have eventually been financed, this obligation will eventually fall on the shoulders of the UK’s taxpayers.’'
“By taking tax action to reduce your individual tax waste now, you will be able to offset some of the likely increase in tax burden... as well as ensuring you have your personal finances in order.”
Tax Saving Tips from unbiased.co.uk’s IFAs
Robert Forbes, Plutus Wealth Management
“Ensure that you are on the correct tax code. This is the number normally followed by a letter on your pay slip from work and dictates the size of your personal allowance. This is the amount of money you earn that is not taxed and so it is best that it is as high as possible. Normally a tax code will be, for example, 647L which means that the first £6,479 you earn in the year is tax free."
"It’s important to check that you’re on the correct tax code by speaking with your local tax office – their contact details are easy to find on the HMRC website. Quite a few people, especially those that have moved from one job to another may find themselves on the wrong tax code or an emergency tax code meaning at worst they pay tax on all their income and have no personal allowance. This can add up to quite a lot as a basic rate taxpayer and even more as a higher rate taxpayer.”
Graeme Mitchell, Lowland Financial
“Higher rate taxpayers will be able to obtain up to 60% relief on pension contributions this year. If you earn over £43,875 you will pay tax at 40% this year on part of your income. Consider paying up to £20,000 into a Personal Pension if you are a higher rate taxpayer. Higher rate tax relief for pensions mean that £20,000 investment will get at least 40% tax relief making the net cost at most £12,000. For anyone earning between £100,000 and £112,950 tax relief on payments made before 6th April 2011 could be 60% - turning a net payment of £5,180 into a pension fund of £12,950. There is nothing else quite like it and it will not be something you can do every year. Pensions are still just investments but with higher rate tax credits available they have a significant boost compared to any other type of investment.”
Lorreine Kennedy, CareMatters
“There are many ways that a person can pass on their estate to the next generation. One such tax break that people often forget is that each tax year a person may ‘gift’ £3000 to anyone person. The first time they do this, they can use the previous years gifting allowance, meaning that the first time one does this £6000 may be passed on to a loved one. This is doubled to £12000 if each couple does this."
"On the surface, this appears to be relatively small fry and so many people ignore this tax break. Over 10 years though, a couple can give away £66000. Another legal way of reducing ones estate is that each person is allowed to give as many gifts of £250 each year."
"For example, if a couple had 4 children and 4 nieces and nephews, then the couple could each give £250 to 8 people. £4000 is then taken from the estate thus reducing the value of the estate. Again, because such small numbers are involved people ignore this break – but over 10 years a further £40000 could be legally taken from the estate to reduce its overall value.”
Gordon Bowden, Quainton Hills Financial Planning Ltd
“Now that tax efficient pension contributions are restricted for those earning over £150,000 other areas of tax efficient investment are becoming more popular. For confident investors with a higher risk profile, Venture Capital Trusts (VCTs) offer 30% income tax relief on investments up to £200,000 in any tax year. Any dividends are free of income tax and gains are capital gains tax free. The VCT needs to be held for at least 5 years to benefit from the tax relief. VCTs invest in small unquoted, OFEX or AIM listed companies."
"This makes them relatively high risk investments and it can be difficult to realise the investment. However the combination of tax relief and the potential for high returns make VCTs worth considering.. If you are unsure of whether they are suitable for you, always seek advice from a qualified, professional independent financial adviser.”
Danny Cox, Hargreaves Lansdown
“Bed & ISA uses the principle of selling a holding within your capital gains tax allowance then buying back the same holding within a tax efficient ISA. This can either top up or fully subscribe this year’s ISA. All future gains and income will be protected from tax in the ISA as the tax slate has been wiped clean. You can choose to buy the same shares or funds back, choose other investments or hold cash."
"The maximum you can Bed & ISA is £10,200. Bed & SIPP appeals to the same principles of Bed & ISA, selling a holding within your capital gains tax allowance then buying back the same holding within a tax efficient SIPP. The amount moved into SIPP is a contribution and therefore benefits from tax relief. A £1,000 Bed & SIPP has £250 tax relief added, a valuable boost to your pension planning and some higher rate taxpayers can claim a further £250 via their tax returns. All future gains and income on the funds in SIPP will be protected from tax as the tax slate has been wiped clean.”
Dan Clayden, Chartered Financial Planner
“The political and economic fallout from a ‘hung parliament’ makes it seem unlikely that there will be any significant tax breaks in the near future and so making sure that you arrange your income to take full advantage of your personal allowance has never been more important. Good planning can help with this, for example by remembering a couple will have two personal allowances and so between them can receive the first £12950 of their combined income effectively tax-free."
"An IFA will be able to recommend other ways in which you can arrange your finances, to ensure that this tax-free allowance isn’t wasted. Also since April, we’ve seen the introduction of a new ‘super’ rate of income tax and the removal of personal allowances from higher earners. For investments, this means that tax wrapper selection has now become even more important, as higher rates of tax widen the effect on returns seen between the most and least tax efficient wrappers. A review with a suitably qualified IFA can help ensure that you are holding your savings in the most appropriate wrapper for your particular circumstances.”
