Recent research shows that on average, UK taxpayers are overpaying tax by £159 because they’re not using all available tax reliefs and allowances.
The main reasons for overpayment of tax are an underpayment of pension contributions (not using up all available tax relief) and overlooking ISAs which attract tax-free returns.
For the current tax year, up to £40,000 can be paid into a qualifying pension although millions of self-employed taxpayers aren’t paying anything in to a pension scheme. If they made the average contribution of £2,840, tax relief of around £568 would be available.
With compulsory workplace pensions now affecting millions of employees, many still have scope to increase their contributions and claim even more in tax relief, although of course this may be difficult for many in the short run.
Taxpayers can pay up to £15,240 in the current tax year into a qualifying Individual Savings Account (ISA) and receive interest tax-free. Perhaps the low interest rates have put many off saving via this option and instead invested where returns are higher and often, subject to tax. It does mean that many are missing out on ISA tax relief, estimated at around £1.9bn for the UK as a whole.
Many taxpayers are unaware that profits on disposals of up to £11,100 in the current tax year are covered by their capital gains tax allowance. It is possible to reduce gains over this amount by offsetting capital losses or making use of unused losses in the prior year. It is estimated that £208m of CGT is overpaid because taxpayers aren’t using up their CGT allowances efficiently.
Inheritance tax is an area which can be fairly complex and frequently gets overlooked with people reluctant to address the issue. It is estimated that £595m is wasted each year through unused IHT reliefs. With careful IHT planning, many assets can be passed on tax-free.