You’re paying too much tax, stop it

We’re finally free of tax! Or we would be if, instead of taking it a piece at a time, the Government just took it all at once at the start of the year.

Every year – to illustrate just how much of our cash the Government spirits away – the Adam Smith Institute calculates how long it would take to pay off our annual tax bill if we did it in days rather than percentages. This year it would take until May 29 – a total of 149 days. That’s two more than last year thanks to changes such as the VAT increase and duty paid on rising fuel costs.

Given the sheer scale of how much of what we make goes in tax, why on Earth would you willingly give the Government anything extra?

Yet millions of us do, so here’s how to legally cut down on what the tax man takes.

Claim back what’s yours

Perhaps the easiest way to pay too much tax is to fail to claim back any accidental overpayments.

For example, just this week, tax specialists at NFU Mutual worked out that as much as £90million in inheritance tax could be reclaimed from HMRC as a result of falling house prices.

The experts looked at inheritance tax breakdowns from the tax office, alongside house price data from the Land Registry. If a property sells within four years for less than it was valued at when the deceased’s estate was being wound up, then the tax can be reclaimed.

House prices have fallen by an average of 11% over the last four years. If you’ve inherited a property then contact HMRC for help reclaiming any overpayments.

Check you’re not overpaying right now

It’s been a bad few years for the tax office. In 2011 alone, a system error at Revenue and Customs caused hundreds of thousands of taxpayers to be sent incorrect codes, meaning they were left paying the wrong amount.

You’re most at risk of this if you receive benefits from your employer like a car or if you recently switched jobs.

Check you’re on the right code as soon as possible, so you can claim back any overpayments. Your code can be found on your pay slip, P60 or P45.

HMRC has a guide to checking your code is correct.

[Related feature: How to make sure you’re on the right tax code]

Should you have stopped paying NI?

Once you reach state retirement age, you can stop paying National Insurance, but many people who continue to work wrongly keep paying it.

That’s because employers often continue to deduct and pay NI contributions. The Pension Service can provide you with a certificate of age exemption, or you can simply show your employer your birth certificate or passport.

If you’ve overpaid NI, the Government has advice on reclaiming the money.

Use your ISA

If you have savings but you aren’t using your annual ISA allowance then you’re simply handing the taxman money you don’t need to.

Savers who keep their money in standard accounts pay tax. So, basic-rate taxpayers give up 20% of the interest they earn, which is deducted before interest is paid into their account. Higher-rate taxpayers pay 40% and top-rate taxpayers fork out 50%.

But money or shares held within an ISA are protected from taxation. You can save up to £11,280 into ISAs this year, although a maximum of £5,640 can be held as cash. The allowance rises each year in line with inflation.

That means you could potentially save tens of thousands of pounds within a few years and the taxman couldn’t help himself to any of your returns.

[Related link: Top-paying cash ISAs]

Prioritise your pension

It’s easy to focus on the money in your pocket, but if you take a more long-term view, you can pay even less in tax.

HMRC gives tax relief on pensions to encourage you to put money aside. In effect, it means the Government is also contributing to your pension savings, so why wouldn’t you take that?

For every £80 you pay into an individual pension, the tax man adds basic rate tax relief at £20. So, your pot gets £100 and you’ve paid £80.

This is because pension payments are made after your income has been taxed. If you’re a higher or top-rate taxpayer then you can claim the tax relief through your self-assessment tax return each year.

[Related link: A simpler way of managing your personal pension]

Make the most of salary sacrifice

Some employers provide benefits to their staff, such as parking and childcare vouchers, which employees can pay for using salary sacrifice.

Take childcare vouchers as an example. If an employer is signed up to the childcare vouchers scheme, workers can pay for care out of their pre-tax salary.
 
You agree to give up a portion of your salary and your employer pays you in vouchers instead. So, if you’re a basic-rate taxpayer and you sacrifice £1,000 in salary, you’re only actually losing the £700 you would have received after tax and NI but gaining a grand’s worth of childcare. In effect, you’re £300 up.

The amount you can benefit depends on your tax band; higher and top-rate taxpayers have lower limits.

If your employer doesn’t offer this kind of scheme then ask for it to be implemented. These benefits make staff happier and can even save the employer cash – after all, it doesn’t have to make NI contributions on the salary that’s been given up.

Be careful if you receive tax credits, however. Any kind of salary sacrifice scheme reduces what you’re paid, meaning you could affect what you’re entitled to.

HMRC has a useful calculator for anyone wondering if they will be better off using childcare vouchers.

[Related feature: 7 hidden perks in your pay packet]

Smoke less, drink less, drive less

Okay, this one may not be popular but think about it. The taxman levies a massive bill on booze, cigs and petrol.

Look at fuel alone. PetrolPrices.com gives as an example a litre of petrol selling for 132.9p. The petrol itself only costs an average of 47.8p. Then there’s duty of 57.95p and a retailer’s share of 5p. VAT is charged against the entire amount, including the fuel duty, so that’s 22.15p.

So out of your 132.9p, 85.1p is simply tax. There’s a good case for high taxes on all those products but the easiest way to cut your taxes is simply to buy less of them.

The same sort of double taxation happens on alcohol and cigarettes, with a massive 81% of the price of a packet of 20 cigarettes going in tax (so that means you’re handing more than a fiver to George Osborne every time you buy a pack, another great reason to quit). More than 30% of the price of a pint goes straight to the Treasury too – adding almost a pound to pub prices in many cases.

[Related feature: Exactly how much can you save by stopping smoking]