With the end of the financial year just a few days away many people will be thinking of ways to ensure they pay as little tax as possible.
The run-up to April 5 every year has traditionally been marked by large inflows of money into tax-free ISAs. But with returns on cash having been particularly low since the financial crisis, there has been less urgency to shelter savings in this way.
Sadly, the government has not yet clarified its plans for a peer-to-peer lending ISA: depending on who comes into power after May’s election we expect to hear more about this in the summer.
But ISAs of course aren’t the only way to reduce the amount of tax you pay – most of us have numerous other options for cutting the Treasury’s take. Research from Unbiased.co.uk, a service that helps individuals find independent financial advisors in their area, suggests that collectively Brits will pay almost £5 billion more in tax than they need to this year – that’s about £165 per person.
So where is this money being wasted?
According to Unbiased, the biggest losses are due to people failing to save into a pension. Pension contributions are automatically topped up with tax relief at 20%, and higher- or top-rate taxpayers can claim more money back through the self-assessment system. This means that individuals are essentially saving the income tax they would normally have paid on this money.
But it is arguable whether this really qualifies as a waste of tax. After all, not everyone can afford to save money into a pension, and those that do have cash to put aside may not be willing to lock it away until they turn 55, as per current pension rules.
If you are putting money into a pension, however, it could be worth doing so through a company “salary sacrifice” scheme. This means that your contributions are taken out of your earnings before they are taxed which means that you not only save income tax but National Insurance too.
Many businesses also use salary sacrifice to help staff buy bicycles or IT equipment – and the higher the rate of income tax you pay, the more you stand to save.
Inheritance tax is another area where people can end up paying too much to the Treasury. A simple way of reducing potential bills is to write your life insurance in trust. This means that payouts from such a policy would be exempt from inheritance tax, which is charged at 40% on any part of an estate above £325,000.
Husbands and wives, or civil partners, can transfer assets such as cash savings and investments to each other to minimise their tax bills. For example, if one spouse is a 40% taxpayer, they could quite legally put their savings into their partner’s name in order to pay less income tax on the interest.
The start of the 2015-16 financial year marks the first time that P2P lenders are allowed to write off any bad debts against their returns when it comes to working out how much income tax is due. Hopefully a P2P ISA will follow in due course.
And finally, there are even greater reductions on the horizon: from next April, the first £1,000 of interest (£500 for higher-rate taxpayers) on savings accounts and P2P loans will be free of income tax thanks to the personal savings allowance announced in the recent Budget.