With a new tax year getting underway from April 6, for some people this will be a time to get on top of their financial planning.
And when you’re sorting out money matters, the last thing you want is a nasty surprise when it comes to tax.
“The tax system is complex, and navigating through it, while keeping on the right side of the taxman, can often be challenging,” says John Chew, a pension, tax and estate planning specialist at Canada Life.
There is nothing worse than finding out you’ve made a mistake and then end up having to pay the tax you owe, or even a fine if you have made a big mistake.
“Keeping on top of your tax position, making the most of the available allowances and thresholds, and ensuring you understand not only your individual tax position but that of any partner, is key,” says Chew. “Never accept on face value that things are correct, always challenge and check, and if in any doubt, seek professional tax advice.”
Here, Chew highlights some common tax mistakes to watch out for…
1. Not understanding your tax code
Tax codes are used by employers or pension providers to work out how much income tax to take. The average taxpayer only checks their tax code once every two years, research from Canada Life indicates.
Chew cautions: “Those who are not on the right code may find themselves out of pocket. If it’s wrong, you may end up contributing more or less than you’re supposed to. Overpaying means you should get a rebate, if and when it’s spotted.”
But underpaying means you may have to make up the shortfall.
People who believe they may be due a refund can visit gov.uk/claim-tax-refund to find out more.
If they believe they owe tax but have not received a letter, they should contact HM Revenue and Customs (HMRC).
2. Breaching the personal allowance for savings
Rises in savings rates may mean some people are close to being pushed over the personal savings allowance. While bank interest or interest on savings is taxable, the personal savings allowance means that the first £1,000 of interest earned is tax-free for basic rate taxpayers, and the first £500 is tax-free for higher rate taxpayers.
The higher interest rate environment we’re now in may make ISAs a more attractive option, as money held in them is ring-fenced from the taxman for as long as it remains in its ISA “wrapper”.
3. Being hit with a pension tax bill
Over-55s can unlock their pension savings under the pension freedoms. Generally, the first 25% of cash taken will be tax-free but the remainder will be subject to tax.
Chew suggests using free online calculators to help you work out the tax due on any withdrawals.
4. Not sharing the tax burden
Some couples may find they can reduce their tax bill under the Marriage Allowance.
It allows one person in the couple to transfer some of their personal tax allowance to their husband, wife or civil partner to reduce the overall amount of tax paid as a couple.
Are you married or in a civil partnership?
💕 Here's a tax saving made for two.
Check if you're eligible for Marriage Allowance ⬇️
— HM Revenue & Customs (@HMRCgovuk) March 21, 2024
5. Falling for a scam
As well as Chew’s tips, remember tax scams can be rife as a new tax year gets underway. Don’t open attachments or click any links in an unexpected email or text.
More information about fake HMRC messages and how to stay safe is available at gov.uk.
