2010 The Year of Tax
With the New Year almost upon us and people starting to think about their New Year's resolutions, Fidelity International is urging the nation to make a pledge to get to get tax savvy. Fidelity's research highlights that the nation is suffering from high levels of ‘tax confusion' with an estimated 33 million UK taxpayers saying tax has them bewildered.
As part of its ‘Know Your Tax' campaign, Fidelity has put together a list of resolutions to help people understand their taxes and make their savings more tax efficient.
1 Get to know your income tax band
More than one in seven (15%) UK taxpayers admit they have no idea which tax band they are currently in. A worrying 91% of the nation is not able to name the correct income tax threshold for higher rate tax and 18% even believe this threshold to be at £50,000 or higher, rather than the current £37,400 limit. This confusion is particularly prevalent among those approaching the threshold - the very people who have the most to gain from a better understanding of how to invest tax efficiently. You can check details of the income tax bands by visiting hmrc.gov.uk. Your tax band determines how much tax you pay on interest, dividends and some other types of return from your savings and investments. By understanding this, you can then consider whether arranging your savings in a different way would be more ‘tax-efficient'.
2 Check your tax code and take action if it is wrong
Your tax code is a mechanism that the taxman uses to collect the right tax from you throughout the tax year. It is made up of a number followed by a letter and details of tax codes can be found at hmrc.gov.uk/incometax/tax-codes.htm. Check that the different letters and numbers that make up your tax code are right, as otherwise you may be paying too much or too little in tax. If you think your tax code is wrong contact your tax office to get it corrected. If you don't understand your tax code or how it has been calculated ask your tax office to explain.
3 Check your savings accounts
Most UK savings accounts will have basic rate tax deducted from the interest. However, those with unused personal tax allowances may not need to pay this. If you fail to take action and pay too much, you may not get the tax back. Sometimes you can elect to receive interest without the deduction of tax. Higher rate taxpayers will be liable to more tax in addition to that deducted at source.
4 Get ISA active
An ISA is a "tax free wrapper" which allows you to save and invest your money without being taxed on the returns from your investment. The full ISA allowance this tax year for those aged under 50 is £7,200 (up to £3,600 of which can be in a cash ISA). This limit is set to rise from the next tax year to £10,200 (up to £5,100 of which can be in a cash ISA). Those born before 5 April 1960 are already able to invest up to £10,200 in an ISA. Saving tax on your investment return means you'll get more back. How much more depends on the type of investment but it can amount to a lot of money. For example, a basic rate tax payer could get 31% more than if they invested without using a tax wrapper. A higher rate taxpayer would see even greater benefit getting 84% more and those hit by the new 50% rate would see the ISA produce 126% more.
5 Get to know about Capital Gains Tax
Fidelity's research shows that just 9% of Britons claim they understand the relevance and implications of CGT on their own tax position, leaving a worrying 91% of the nation ‘CGT confused'. CGT is a tax, currently at 18%, on the gain you make when you sell or ‘dispose of' an asset. The tax applies to a variety of assets including many investments (stocks and shares, unit trusts, OEICS). Despite the fact capital gains up to £10,100 per year are tax free for most people, almost one in three (27%) don't consider CGT relevant to them. Like with ISA tax breaks, if a year's tax-free allowance remains unused it will be lost and cannot be transferred into the next tax year. Knowing about CGT can help you reap some ‘tax-free' return or pay a lower rate of tax than income tax.
6 Workplace pension provision
More than half (52%) of employees in the UK have a workplace defined contribution pension scheme, but only half of those that do are contributing to it personally and making the most out of the tax benefits on offer. Pensions can be one of the best ways to save for retirement, so check to see what's on offer at your workplace.
7 All change in the new tax year - check how it will affect you
From 6 April 2010, there will be a new top rate income tax band of 50% for people with incomes of more than £150,000. Also, those with incomes of more than £100,000 will lose all or some of their personal income tax allowance. It is therefore important for people with incomes over £100,000 to understand if and how these upcoming changes will affect them to make sure they can take this into account when looking at their tax planning needs.
Paul Kennedy, Head of Tax and Trust Planning at Fidelity International, says: "There are many things that people tend to add to their lists of New Year resolutions, but I doubt a tax review would feature on many. However, our research clearly shows that as a nation we are gripped by a wave of tax illiteracy, which may mean we are simply throwing our own money away by gifting unnecessary cash to the taxman.
"Only 15% of the nation have made use of tax efficient savings and investment wrappers to help reduce their tax burden, while just one in ten (10%) have sought professional help with their tax planning.
"Tax affects us all and we owe it to ourselves to keep as much of our hard earned money as we can. Make it a ‘New Year Tax resolution' to have a good understanding of your own tax position and get your savings in order. There are a number of steps people can take and we hope to help Britons better understand how to invest wisely."