W2D-002 Regulations-0.txt
Are you paying more tax then necessary?

More than 28 million people in the United Kingdom are paying more tax than they need to.

Last year alone, we handed over in excess of £ 5 billion to the Inland Revenue which could have been avoided if our affairs had been arranged more tax efficiently.

Without this contribution, the Chancellor would have had to raise the basic rate to 26.5p to collect the same amount.

This startling information was recently revealed in research commissioned by IFA Promotion Ltd. Using the latest available Inland Revenue data, the report isolated almost £ 1 billion of tax paid in error; £ 1.3 billion which could have been easily avoided; and, over £ 3 billion which could have been saved by implementing rather more complex tax-saving strategies.

The largest are of tax "waste" (over £ 5 billion) can be traced back to people not claiming their allowances. Income which should fall within their tax-free allowance ends up being taxed.

Waste occurs when married couples, with one partner earning more than the other, do not use their allowances to best effect. If one spouse pays tax and the other doesn't, a switch of income into the non-taxpayers name would mean that the income would go from being taxed to tax-free.

With the married couples allowance now fully transferable, higher earning wives can achieve a greater slice of tax-free income, while the widening of the 20 per cent tax band also offers scope for tax saving.

Bank and building society accounts also provide fertile ground for tax waste. Deposits with banks and buildings society are taxed, at source, at the 25 per cent rate.

Those people paying tax at the 20 per cent rate can claim a refund of 5 per cent while non-taxpayers can ask for the interest to be paid gross. But an estimated £ 360 million tax was paid last year by people who have either failed to register for gross interest or failed to reclaim the tax overpaid.

A further £ 550 million could have been savvied if a greater number of banks and building society investors had made use of the Tax Exempt Special Savings Account (TESSA). The TESSA allows savings (up to £ 3,000 in the first year and up to £ 9,000 over five years) to grow tax free as long as they are held for the full five year period.

Shareholders, both those holding equities direct or via a unit trust or investment trust, are wasting an estimated £ 750 million in tax.

A small part of this total results from non-taxpayers failing to reclaim the tax paid on their dividends, but the largest proportion stems from insufficient use being made of the Personal Equity Plan (PEP).

The PEP allows up to £ 9,000 worth of equities to be held in a tax-free environment each year. The savings in one year, while perhaps only marginal for the basic rate taxpayer, can mount up considerably over a period of time.

The potential savings are obviously enhanced for the higher rate taxpayer. And yet, of up to 13 million share or unit trust holders, some 9.9 million have no PEP at all.

Please remember that the levels and bases of taxation can change. The reliefs referred to are those that currently apply and the value of relief from taxation is dependent on individual circumstances. In addition, you must bear in mind that the value of shares and units can fall as well as rise and the return may be less than the amount investment.

Inheritance tax is a particularly nasty tax in that it is levied on assets which have been accumulated with income that has already been taxed.

The one thing in its favour, however, is that by utilising wills, life policies, gifts and the annual exemptions available, its impact can be largely mitigated.

Few people though, plan ahead for inheritance tax and, as a result the Inland Revenue takes in around £ 1.3 billion every year from this source.

Another area of waste can be attributed simply to mistakes made by the Inland Revenue.

There are by no means infallible, but too many people accept what the Revenue say the owe without checking the figures. Random checking by the Inland Revenue in 1992/93, in an effort to find tax fiddlers, revealed some £ 270 million of tax overpaid, but this is obviously just the tip of the iceberg. A further £ 170 million could be saved if people declared all their income and paid their tax bills on time thereby avoiding penalties, which can be severe.

Areas of potential tax savings abound. There are still many people for whom it would be tax efficient to contract out of the State Earnings Related Pension Scheme (SERPS) while over £ 100 million could be saved by using the products of the Department for National Savings more effectively.

The tax treatment of life assurance products, particularly friendly society policies, could again save more than £ 100 million per year.

Nobody likes paying tax, so it makes sense to cut out as much of the waste as possible. Impartial, independent financial advice from someone well versed in the tax planning field is essential if you are to make the most of the opportunities available.

This article has been authorised by a person who is regulated in the conduct of investment business by the Securities and Investments board.(SIB).
