Jeff Salway: Taxman gains from inefficient savers

The pounds wont take care of themselves savers must take active steps to cut personal tax wastage. Photograph: Brian Jackson/Getty/iStockphoto

GOVERNMENT coffers are primed for a £4.9 billion gift from ordinary savers and investors in the UK this year as tax-saving opportunities continue to go begging.

People ploughing money into taxable savings and investments without using their annual allowances will overpay an average of £165 in 2015, according to a new study.

The annual Tax Action report from advice group unbiased.co.uk found that some £200 million more than last year will be lost to tax inefficiency, despite the ongoing pressure on household finances.

The research, published ahead of the 31 January deadline for filing online self-assessment returns, also found that three-quarters of taxpayers admit to having done nothing over the past year to cut their personal tax wastage. Almost half believe they are already paying the minimum amount, but the figures suggest otherwise.

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Karen Barrett, chief executive of unbiased.co.uk, said: “Millions of UK taxpayers are putting their money into taxed saving and investment products, when there are substantial reliefs, allowances and better rates readily available. Changes to tax legislation, as well as the new pensions freedoms, make it seem less stressful to take no action, but there are simple steps that will make a real difference to your finances.”

The biggest area of wastage is in pensions. Workers rejecting the chance to save into pensions provided by their employer are missing out on an estimated £2.9bn in tax relief on contributions.

The average annual pension contribution of £3,490 includes almost £700 in tax relief, said the report. But the 4.2 million adults in employment not paying into a workplace pension are therefore not benefiting from the money chipped into pensions by the government.

The complexity of the pensions system is partly to blame, said Derek Stewart, managing partner at Sam Wealth in Glasgow.

“However, even for a basic rate taxpayer the 20 per cent tax relief is such an attractive incentive. How long does it take to turn £80 into £100 in an ordinary investment?” he said. “It happens instantly with tax relief on a pension contribution and the argument gets stronger with higher rates of tax.”

Isas are also being overlooked by large numbers of savers and investors, despite the increase last year in the annual tax-free allowance to £15,000.

Millions of bank account holders with money in products that attract tax will waste more than £1.3bn by neglecting to use their annual Isa allowances, according to Unbiased – up from £1.1bn last year.

The bulk of that wastage is due to money being saved into taxable cash accounts, with another £104m held in stocks and shares that aren’t in Isas.

“If investors understood the true value of Isas they would be more diligent in maximising their annual allowance every year,” said Stewart. “With the ability to have the full Isa transferred on death it makes even more sense to do this.”

Yet only a fifth of investors in Scotland plan to make full use of their Isa allowance this year, new figures from Octopus Investments show, compared with more than 30 per cent in some southern areas of the UK.

Another £550m will be spent unnecessarily on inheritance tax (IHT) that could have been avoided if life insurance policies had been placed in trust. The figure is set to rise as house prices increase and the threshold above which IHT is charged at 40 per cent remains frozen at £325,000.

The amount of money being paid needlessly on capital gains tax (CGT) will go up too. Around £158m will go on CGT charges when it could have been avoided by using Isas to shelter investments from tax.

Up to £11,000 of capital gains can be taken tax-free in the current tax year, rising to £11,100 in April. Gains above that level are taxed at 18 and 28 per cent for lower and higher rate taxpayers respectively.

The widespread failure to use the allowance is a simple case of low awareness or understanding among investors, according to Stewart. “Investors should take the opportunity each year to utilise this allowance because if it’s not used then it’s lost,” he pointed out.

There are potential downsides to consider when cashing in investment gains for tax purposes, however.

“What has to be taken into account are the charges in selling and buying back the stock and the possible movement in the price of the assets while they are out of the market, which can work for and against.”

But someone wanting more income from their portfolio – as so many investors do in the current climate – can use the annual CGT allowance to effectively generate £11,000 a year tax-free (£22,000 a year for a couple).

“With the reduction in tax breaks these days, this is one you should be doing – it’s a no-brainer,” said Stewart.