Bag your share of billions!

The taxman admits that up to 10 million people have paid too much tax. Time to trim your tax bill...

It’s not been a great year so far for HM Revenue & Customs (HMRC), alias the taxman.

In early September, HMRC admitted that nearly six million people had paid the wrong amount of tax. It estimated that 1.4 million owed about £2 billion, while HMRC owed £1.8 billion to around 4.3 million taxpayers.

However, giving evidence to the Public Accounts Committee this month, the boss of HMRC admitted that millions more people could be affected by problems with the PAYE (Pay As You Earn) tax system. Millions of files from the 2008/09 tax year have yet to be checked, so the final figure for incorrect tax demands could be as high as 10 million.

Ten tax-trimming tips

Given the problems with HMRC’s new PAYE computer system, the onus is very much on you to make sure that your tax affairs are in order. Here are ten tips to help you work out whether your tax bill is correct -- these will also help you to trim future tax bills:

1.     Submit your SA100 on time

The easiest way to complete your self-assessment tax return (SA100) is to file it online at the HMRC website. By doing so, you have until 31 January each year to file the previous year’s tax return. If you file your SA100 late or pay your tax bill after 31 January, then you’ll automatically be fined £100. Another £100 fine is due if your SA100 and payment aren’t in by 28 February.

Don’t leave it too late!

2.     Inspect your Notice of Coding

HMRC sends out Notices of Coding each year to inform taxpayers of their tax allowances and deductions. In my experience, these tax codes are very often wrong. For example, my latest Notice of Coding includes a deduction of £215 for private medical insurance (PMI) -- something I haven’t had since 2003.

So, check your tax code carefully for incorrect deductions. In particular, pay close attention if you’ve recently switched jobs, have a company car or receive other taxable company benefits such as PMI. Be very careful if you have a common name, such as John Smith. Incorrect Notices of Coding can and do get sent to taxpayers with similar names.

3.     Check your savings interest

Most taxpayers pay tax of 20% on their savings interest, as this is deducted ‘at source’. Higher-rate (40%) taxpayers then pay another 20% tax through their tax returns. However, at least three million people -- including many pensioners -- are non-taxpayers, so they don’t earn enough to pay any tax at all.

If you’ve needlessly paid tax on your savings, then you should claim it back by completing and submitting an R40 form. You’ll need to fill in a separate R40 for each tax year, and you can reclaim overpaid tax going back six years. To stop tax being deducted from future savings interest, submit an R85 form to your bank or building society.

4.     Record your pension contributions

Of course, one simple way to trim future tax bills is to pump up your pension contributions. Not only will this save you tax, but it will help boost your income during retirement.

When you pay money into a pension, you get tax relief on these contributions. For basic-rate (20%) taxpayers, this means a £100 contribution costs you just £80; for higher-rate (40%) taxpayers, a £100 contribution costs a mere £60. Therefore, it is very important to inform HMRC of all pension contributions you make each tax year.

If all your pension contributions are made via a workplace scheme, then tax relief should be applied via PAYE. However, if you make additional contributions into a personal pension or SIPP, or you are self-employed, then tell the taxman about these extra payments. Otherwise, your tax bill could be too high.

5.     Make full use of ISAs

By saving or investing inside an ISA -- an Individual Savings Account --  you can shelter savings interest, capital gains and share dividends from the taxman.

In the 2010/11 tax year, adults can put up to £10,200 into an ISA, which includes up to £5,100 in cash. All income and gains generated inside this popular tax shelter are free of tax. So, don’t make the mistake of including ISA income (and other tax-free income) in your tax return. Otherwise, you’ll turn a tax haven into a taxed haven!

6.     Don’t forget Gift Aid

Most contributions to charities and other good causes are made via a tax-efficient scheme known as Gift Aid. The basic-rate tax relief claimed by charities via Gift Aid automatically turns a donation of £10 into £12.50. Also, until the end of the 2010/11 tax year, HMRC makes an additional payment of 3p in the pound to charities. This extra supplement boosts a £10 donation to £12.80.

Via their tax returns, higher-rate taxpayers can reclaim a tax rebate worth 20% of their Gift Aid donations. In the above example, this would be worth £12.50 x 20% = £2.50. Therefore, keep a record of all your charitable donations and include these in your tax return.

7.     Curb your Capital Gains Tax (CGT)

You may be liable to Capital Gains Tax if you make profits from selling shares, property (but not your main home) and other assets which have increased in value. The good news is that we each have a yearly CGT allowance (£10,100 in 2010/11), below which CGT is not payable. The usual rate of CGT is 18%, but this rises to 28% for higher-rate taxpayers.

If you have gains in excess of the CGT allowance, then it makes sense to spread these gains over two or more tax years, instead of landing yourself with a bigger tax bill by selling in one go. Also, you can offset losses against gains and thus pay CGT only on your net gain. Likewise, by gifting assets to your spouse (or same-sex Civil Partner), you can make use of two CGT allowances.

Here are Ten ways to avoid Capital Gains Tax.

8.     Watch out for tax-free benefits

HMRC and the Department for Work and Pensions pay out billions of pounds a year in tax-free Child Benefit, tax credits and other non-taxable state benefits. Nine in ten families get some kind of government payout to help make ends meet.

When completing your SA100, please don’t make the mistake of including these tax-free payments as part of your income, or you’ll pay too much tax. You’ll find a long list of non-taxable benefits on the HMRC website.

9.     Catch your childcare vouchers

As I explained in Grab £3,000 of free money, childcare vouchers are a very valuable benefit for working parents with children aged under 16.

In return for sacrificing up to £243 of his/her monthly salary, a parent can receive the same amount in tax-free childcare vouchers. In effect, this reduces his/her taxable income by £2,916 a year. This could mean a substantial saving, especially for 40% and 50% taxpayers. Two highly paid parents both taking £2,916 in childcare vouchers could save nearly £3,000 a year in tax.

10.    Look for previous mistakes

Now that you’ve got to grips with your latest tax return and have found out how to avoid the most common mistakes in future, it’s time to look back. Who knows how many unintended or accidental errors lurk in your previous SA100s?

By checking earlier tax returns, you could reclaim overpaid tax going back six years, which could amount to a tidy windfall. So, what’s keeping you? Attack your tax bills today!

More: The safest savings accounts | Why investing is not gambling