What’s worse than paying tax? Paying tax unnecessarily.
And according to a new report, that’s exactly what UK taypayers are doing – to the tune of £4.6bn.
The 2016 TaxAction report, produced by personal finance advice site unbiased.co.uk with Prudential, found us Brits are regularly overpaying several billions of pounds in tax.
From failing to make full use of allowances on savings and investments, to failing to make a plan for your estate before your death, the lack of financial know-how is leaving taxpayers out of pocket.
It’s not all bad news. The report found that overall the UK’s tax wastage is down from 2015 by £300m.
This is mainly due to the uptake of workplace pensions after the introduction of auto-enrolment, which saved £1bn in tax.
But if we were a bit more savvy, UK taxpayers could save a total of £1.9bn just by contributing more to our pension pots.
Other areas where we let ourselves down include failing to use tax-efficient savings and investments like ISAs, not taking steps to reduce capital gains tax, and a lack of estate planning to reduce inheritance tax.
According to the report there are a whopping 65m current accounts in the UK, yet only 10.29m people use cash ISAs – meaning Britons are missing out on a potential £1.89bn in tax-free interest.
Other potential savings include £595m in inheritance tax through better estate planning, £208m in overpaid capital gains tax, and £134m overpaid on stocks and shares help outside of ISAs.
While the amount we’ve overpaying in tax is guaranteed to surprise most Britons, what’s even more shocking is the fact we don’t know anything about it.
Asked about their tax bills and whether they do anything to reduce them, 47% of UK adults thought they couldn’t pay any less tax than they do now.
15% said they’d already taken all possible measures to make sure they weren’t paying out unnecessarily, 18% said they had taken any action in the last year to reduce their bill, and 22% said they just hadn’t thought about it.
It’s not the first time or last time pensions will hit the headlines in 2016, with George Osborne expected to announce the results of a Treasury inquiry into pension taxation in the budget on 16 March.
Ministers are considering changes including making pension saving more like contributions to ISAs, as well as replacing variable tax relief on pension contributions with a single flat rate.
At the moment, if you’re a basic taxpayer you get 20% tax relief on pensions, while higher rate taxpayers – those who earn between £42,000 and £150,000 – receive 40%.
Additional rate taxpayers, whose earnings top £150,000, get 45% tax relief.
But potential changes could see these rates replaced with a rate somewhere between 25% and 33%.
That would leave basic rate taxpayers better off, but higher earners could end up losing out.
Some critics have also warned that savers will lose out when the pension lifetime allowance – the maximum sum you can save into a pension through your life – falls from £1.25m to £1m on 6 April.
Those who break the limit could face taxes of up to 55% when they withdraw their pension money, although that number is likely to be in the minority rather than the majority.