We are paying £153 more in tax than we need to

No one wants to pay too much tax. Yet research shows many of us do just that. Here's how to make sure you don't.

We are set to needlessly give away £4.6 billion in tax this year according to a new report from unbiased.co.uk and TaxCalc.

The research has found that each of us are handing over an average of £153 more tax than we need to.

There were four areas highlighted in the report where we are being especially generous to the Treasury:

Source: unbiased.co.uk

So now we know where the tax waste is coming from, let’s look at how to stop it.

1. Use your ISA allowance

When we save money in a savings account any interest we earn is taxed. But anyone over the age of 16 can protect a chunk of their savings from tax each year by putting it in an ISA wrapper.

Every year you get the choice to invest the whole allowance set by the Government in a stocks and shares ISA or to split it up and put up to half into a Cash ISA.

According to the unbiased.co.uk/TaxCalc research 30% of tax waste came from unused ISA allowances.

So the race is on. There are only 16 days left to take advantage of the 2012/13 allowance of £11,280, up to £5,640 of which can be saved in a Cash ISA.

Sadly if you don’t use it you lose it, as your allowance in one year doesn’t carry over into the next. But if you do manage to save something each year that pot remains tax-free as long as you keep it in an ISA wrapper.

The report also found that Junior ISAs are often underutilised with 145,000 potential accounts unopened. Junior ISAs replaced Child Trust Funds but haven’t been taken up as keenly. Read Junior ISAs one year on: many barriers remain for more on why.

Make sure you are making the most of tax-free savings by taking a look at the best accounts available in: The best Cash ISAs and The best Junior ISAs.

2. Pay into your pension

Anyone paying towards a pension will attract tax relief on their contributions.

So if you’re a basic rate taxpayer you save 20%, those on the higher rate will save 40% while those on the top rate will save a whopping 50% (for now, anyway!).

Some employer pension schemes work by taking the pension contribution from your pay before income tax is applied. But in other cases, like for personal pensions, you need to claim the tax relief you are due through a tax return.

The average pension contribution of £3,010 (according to HMRC) would attract £602 a year in tax relief for a basic rate taxpayer.

Although you do get taxed when you eventually come to claim your pension the boosted pot can help you get a better tax free lump sum as well as a better deal on an annuity.

3. Plan for your death

Unbiased.co.uk and TaxCalc have found a £24 million rise in inheritance tax waste since 2012.

If you have a large estate worth more than £325,000 (£650,000 for couples) when you die, everything above this threshold will be subject to a levy of 40%.

So in order to avoid diminishing what is left behind you might want to start planning how you can reduce the Inheritance Tax bill for your heirs.

One way is to make sure any life protection policy you have is held ‘under trust’. By doing this you remove the payout you might receive when you die from the total value of your estate. So with a £100,000 policy you would save your heirs £40,000. According to unbiased.co.uk/TaxCalc this sort of careful tax planning can save your heirs £472 million in inheritance tax. Read Save your family thousands in taxes for more on how to do this.

You could also try using a method of pre-inheritance which involves sharing out parts of your estate before your death as gifts. These are known as Potentially Exempt Transfers. The rule is quite simple; any gifts you make to anyone will be IHT free as long as you survive seven years after making them. If not the gift will be counted as part of the estate but on a sliding scale if you die between three and seven years of leaving it.

Read more about minimising IHT in: How to cut your Inheritance Tax bill.

4. Reduce your Capital Gains Tax bill

Capital Gains Tax (CGT) is payable on assets which have increased in value by the time you sell them. These can include things like shares or the sale of second homes like buy-to-let properties.

Each UK taxpayer gets an annual tax-free allowance on CGT. For 2012/13 this is £10,600, so gains made above this value are charged 18% for lower and 28% for higher rate taxpayers.

According to unbiased.co.uk and TaxCalc £171 million is set to be lost to CGT unnecessarily.

Figures from the research shows that the main cause of CGT waste is not using a stocks and shares ISA to shelter money from tax. The sale of stocks and shares inside an ISA are protected from CGT, but outside are not.

For more on how to avoid paying too much CGT read: Ten ways to avoid Capital Gains Tax.

More on tax:

HMRC names and shames tax cheats

We've been deceived about tax avoidance!

HMRC crackdown on tax-dodging Southerners

HMRC closes face-to-face help centres to save money

Rent A Room scheme: tax-free cash from your spare room

Second home council tax discount to end in April

Bedroom tax: concessions for foster carers, the military and the disabled