Millions paying over the odds in tax, as reliefs deemed too complex to claim

Millions of people are paying more tax than they ought to, fresh figures show, as

Millions of people are paying more tax than they ought to, fresh figures show, as the Government faces calls to overhaul the complex relief and claims system. 

Close to a fifth of Britain’s 5.3 million sole traders and micro business owners are paying on average £722 over the odds each year, to the tune of £650m, according to data collected by the online accountants Coconut.

More than half of sole traders surveyed by the firm admitted they failed to claim reliefs or deduct expenses from their tax bills, even if they suspected they were eligible. 

Experts have said a needlessly complex system is to blame and it affects employees too. 

Today, there are 1,190 tax reliefs. All require taxpayers to submit a manual claim to benefit. 

More than five million employees each year claim tax relief on expenses not reimbursed by their employers, but many are missing out.

Bill Dodwell, of the Office of Tax Simplification, said a complex system and the huge number of breaks on offer meant tax payers were not claiming the reliefs they were entitled to. He said of particular concern was claims for employee expenses and higher-rate taxpayers failing to claim tax relief on pension contributions.

The OTS, the Government’s independent tax policy advice body, has published 15 fresh recommendations on how the system could be simplified, leaving the self-employed and employees with more money in their pockets as the economic climate worsens. 

These include HM Revenue & Customs building an online portal so claims that currently have to be made via separate forms could all be made in one place. Claims should have one collective deadline, such as at the end of the tax year, instead of individual cut-off dates so fewer people missed out, it recommended. 

It also proposed a system of flat-rate employee allowance for expenses of up to £120 a year for some taxpayers, saying the current array of allowable expenses was unclear and that there were too many ways to claim. 

Claiming additional pension tax relief should also be easier, it said. Today, higher-rate taxpayers have to manually apply for relief above the 20pc basic rate directly with HMRC, via a tax return, by writing or calling. It should be possible to claim this online, it said. Tax relief on pension contributions is due at the same rate you pay income tax. 

Telegraph Money recently reported how five million people had so far failed to claim new, temporary tax breaks introduced in April for those forced to work from home. Taxpayers can apply online via the HMRC website.

Chris Etherington, of accountants RSM UK, said pension tax relief was one of the most valuable reliefs that often went unclaimed. 

Failing to make a “gift aid declaration” when giving money to charity can also be costly, he said. Gift aid will leave your chosen charity with an extra 25pc for each pound you donate, but sometimes the charity cannot claim unless the donor gives permission. If you failed to do this before, you can make retrospective declarations on donations going back up to four years. 

Making a “Form 17” election was also an important protection some overlooked, Mr Etherington said.

“When a rental property is owned by a married couple or by civil partners, HMRC will usually split the income equally between them,” he explained. “If the property is not in fact owned in 50:50 shares, the couple can make an election for the income to be assessed on them in the actual ownership percentages. This can make sense when one of the couple pays income tax at a lower marginal rate than the other.”

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