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Stop paying too much tax!

Stop paying too much tax!

Category: Money

Updated: 11/06/2014
First Published: 11/06/2014

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Paying tax is a fact of life, but no-one can say they really enjoy it. However, it seems that a lot of people are actually paying more than they need to – and all because they're not maximising their tax-efficiency.

Research from NFU Mutual has found that 26% of respondents are paying too much tax on their savings and investments, with just 47% having any savings in an ISA. Given that 27% have no savings at all, the rest – the 26% – will be paying unnecessary tax on their nest eggs.

Why would you want to pay tax you don't need to? By failing to use an ISA or other form of tax-efficient wrapper, you're effectively putting extra cash straight into the taxman's pocket. As Sean McCann of NFU Mutual says, "If you have savings and investments but no ISA, you could be losing out."

You want to make full use of your ISA allowance, and with the limit set to rise to £15,000 and the rules becoming more flexible, there's the potential to benefit even more. It's perhaps the simplest way to stop paying too much tax and is something that everyone can get on board with – as minimum deposits start from just £1, there's nothing to stop you from building up your nest egg as and when it suits you.

However, if you're lucky enough to be in a higher tax bracket, there's another way to maximise your tax-efficiency – by making sure you contribute to your pension. Failing to do so means you're missing out on a huge amount of tax relief, as research from Prudential has revealed, and even though you're not technically paying too much tax by not contributing, you're certainly losing out.

They calculated that the average higher rate taxpayer earns £63,000 a year. Those surveyed who make additional contributions to a defined contribution pension scheme put, on average, £523 a month into their fund, receiving tax relief of just over £200 a month – or over £2,500 a year – which goes directly into their pension fund.

That's an extra £2,500 per year that can be put towards securing a retirement income, so why wouldn't you want to make the most of it? Apparently, not everyone does, as their research also found that one in ten higher earners don't make those contributions.

Clare Moffat, of Prudential, commented: "Saving into a pension offers valuable tax relief to all workers and particularly to higher rate taxpayers. However, our research shows that a significant number of higher rate taxpayers are passing up the opportunity to receive an extra helping hand with their future retirement income.

"A career spent earning a relatively high income doesn't guarantee a comfortable retirement. It's easy to see how pension contributions can be overlooked. But the good news is that it is never too late to take action and to start saving as much as possible."

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