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MONEY: Why pour your money down a drain; No-one likes paying tax - yet we willingly hand over thousands more than w need to. Jane Hall reports.

Byline: Jane Hall

HO wants to be a millionaire? We all do. From the National Lottery with its multi-million pound prize winning permutations to Premium Bonds and the football pools, it seems we can't find enough ways to spend money in the hope of accruing it.

The chance of scooping the National Lottery jackpot is a staggering one in 14 million, however. The odds on winning one of the two monthly pounds 1m Premium Bond prizes are also huge. You would be a fool to give up the day job in the hope of becoming an instant millionaire.

For, despite the myriad ways now on offer to win big money, achieving millionaire status will be a dream that fails to come true for most.

But if you were lucky enough to win pounds 1m, what would you do with it? Almost certainly you would buy a new home, and perhaps a sporty car. Unless you are possessed of a deep-seated social conscience you would be unlikely to give the cash away - especially to the taxman.

Yet that is exactly what many taxpayers are doing - albeit unwittingly. According to new analysis from AXA, British households will pay an average pounds 603,697 each in tax during their lifetime, with higher earners channeling pounds 1m or more into the Treasury's coffers.

The average household with two earners under 30 years old would need a combined income of just pounds 47,891 a year in order to pay pounds 1m in tax during their lifetime. And average British households aged between 30 and 50 years old only need a combined income of pounds 50,830 to end up being tax millionaires.

The figures additionally show that on average British households pay around 35.5% of their earnings in tax, with income tax and National Insurance accounting for pounds 311,507 in their lifetime.

However, indirect taxes make a significant difference, with fuel tax costing pounds 125,294 over the household lifetime.

Vehicle excise duty boosts the bill further to around pounds 7,244. Perhaps more worrying is the amount we spend on alcohol and tobacco taxes. Theaverage British household forks out pounds 16,963 on tobacco tax and pounds 15,333 on alcohol duties in the course of their lives - a clear message to give up both vices for the sake of your purse strings if not your health.

It's not just the living who are taxed, however. Further figures from IFA Promotion, which promotes the benefits of independent financial advice, reveal UK adults will collectively waste pounds 1.6bn through poor inheritance tax planning (IHT) this year - pounds 400m more than 2004.

And with a recent report by Lombard Street and Grant Thornton forecasting 3.6 million UK estates will be liable for IHT by 2009, this waste looks set to keep growing - unless people take action to reduce it.

Here we highlight the main tax planning initiatives that will save you money - and help you beat Chancellor Gordon Brown at his own game. CHECK YOUR CODE A simple one - but something many fail to do - is checking you have the right tax code. If you haven't, you could be paying over the odds. INDIVIDUAL SAVINGS ACCOUNT (ISA) Use up your annual ISA allowance. A collective pounds 127m in tax could be avoided by sheltering investments in this way, or moving savings from an ordinary deposit or savings account to an ISA, according to IFA Promotion.

The advantage is that all funds held in an ISA are free of income and capital gains taxes.

An ISA can hold three types of investment - cash, stocks and shares or life insurance.

You can open a mini-ISA of up to pounds 3,000 in cash or stocks and shares or pounds 1,000 in insurance, or a maxi-ISA of up to pounds 7,000, split between cash, stocks and shares and insurance.

Also consider a friendly society savings account or products from National Savings & Investments as additional tax-efficient savings options. R85 FORM By spending just two minutes filling in a simple form, non-taxpayers could save themselves an average pounds 53 each.

The R85 form - available from banks and building societies - informs the Inland Revenue of an individual's "non-taxpayer" status, enabling interest to be paid tax free into their savings accounts. EMPLOYEE SHARE SCHEMES UK workers will miss out on pounds 285m of tax breaks this year by failing to take advantage of employee share schemes.

The amount of money being wasted in this way has seen an 80% increase since last year, and yet the figure is just the tip of the iceberg accounting for only 5% of annual tax wastage in the UK.

The figure represents theamount of tax which could be saved if each of the estimated 865,000 staff currently in savings-related share option scheme invested just half the level of investment permitted under the Government's Share Incentive Plan (pounds 1,500 each), launched in 2001.

The Share Incentive Plan, currently run by only 435companies, is said to be one of the most tax advantaged all-employee share schemes ever to be introduced in the UK. The main features of this scheme are: p Employers can give up to pounds 3,000 worth of "free shares" a year to workers free of tax and National Insurance.

p Employees can buy up to pounds 1,500 of "partnership shares" from their pre-tax monthly salary or weekly wages, free of tax and National Insurance Contribution liability.

p Employers can give workers up to two free "matching shares" for each partnership share the employees buyp Employees who keep their shares in the scheme plan for five years pay no income tax or NIC on profits made on their sale.

Employees who take their shares out of the scheme plan after three years will pay income tax and NIC only on the initial value of the shares.

David Elms, chief executive of IFA Promotion, says: "There are currently only 5,841 companies running employee share schemes, which is almost 2,000 less than last year. A substantial amount of tax is being wasted by failing to take advantage of employee share schemes." STAMP DUTY You can save thousands if you negotiate with the person you are buying a house from to drop the price below the stamp duty threshold, which currently stands at 1% for properties between pounds 120,000-pounds 250,000, 3% between pounds 250,000-pounds 500,000 and 4% over pounds 500,000INHERITANCE TAX You don't have to be rich to fall into the IHT bracket.

Currently, it's levied at 40% on everything you leave over pounds 275,000 (pounds 285,00 next tax year rising to pounds 300,000 in 2007), and includes your investments and savings; your home and car; your furniture and personal effects and the proceeds of your life insurance, unless it is written in trust.

IHT is paid by those that inherit and is deducted from the estate on death. So IHT planning is relevant whether you stand to gain an inheritance or you plan to leave one.

There are a number of ways you can reduce any possible liability.

For example, you could make gifts now to intended beneficiaries as these are free of IHT providing you live for seven years or more. There are also several other tax-efficient ways of making annual gifts, both to individuals and organisations

It pays to start early

VICTORIA TURNBULL, right , has had a private pension since she was only 18.

By the age of 22, she had bought her own home, after taking out a special homebuyers' savings plan.

Six years ago, the 34-year-old began paying the maximum pounds 3,000 a year into a tax-free cash ISA, and in July 2004 she realised her dream of starting her own mail order soft furnishings company, Hibiscus Home, after utilising the capital in her home to finance the project.

She has recently used some of her ISA cash to finance the construction of an e-commerce site for her business - Victoria has no need yet to tackle inheritance tax planning, but will do so as soon as the need arises.

The businesswoman who worked for 10 years as an assistant accountant at Newcastle University, has always been good with money - and she isn't about to let the taxman get any more than he is owed.

"I've had the pension since I was 18 because I knew I wanted to be financially secure and eventually have the chance to set up my own business. I pay inas much as I can afford to reduce my tax bill.

"I also donate monthly to Oxfam and made sure I use gift aid, as this is also taken into consideration at the end of the tax year - and helps the charity too."

Her only mistake, she claims, was not signing up to Newcastle University's occupational pension scheme. "When I started at the university, I didn't think I would be there a year, let alone 10 years, so I never opted into the pension scheme. I was a bit daft as, not only was it a good scheme, but it would have been tax efficient."

Victoria is currently awaiting a pounds 2,500 tax rebate after successfully offsetting previous years income tax against rental income from her first home, which she now lets out.

And she fully intends to make use of tax breaks and other benefits for using her current home in Dalton-le-Dale as an office.

With Hibiscus Home taking off - she has recently supplied the furnishings for new Yuill show houses in the New Year - her next step will be to investigate the pros and cons of getting a company car.

"I need to find out if it will be beneficial off-setting a car against the business. I do claim business expenses at the moment as I have to travel a lot, but I don't know if having a company car will be tax efficient for mesuch as charities. You could then leave a further pounds 275,000 free of IHT in your will.

Gifts between married couples are not subject to any IHT.

You might like to think about putting part of your estate into a trust for your grandchildren.

This way it could be decades before your cash is again under the eye of the taxman.

Trusts can be complicated, however, so you will need to seek financial advice in conjunction with a solicitor.

Another option is to take out an insurance policy to pay the tax bill after you die.

And of course, you must write a will, as it's the only way to ensure your loved ones don't miss out on their inheritance - and to limit the tax paid on your estate.

David Elms says: "People need to be aware that the IHT threshold has failed to rise in line with soaring property prices over the last few years and that you don't have to be rich to be subject to IHT

TAX ALLOWANCES Maximise your personal tax allowances. For example, married couples can transfer assets such as savings or stocks and shares between each other if one spouse pays tax at a lower rate than the other.

This allows the interest earned to bear less tax, and there is no capital gains tax charge on such transfers.

And if there is sufficient income to fully utilise the married couples' allowance (for those aged 65 or more), the surplus may be transferred between spouses. Also, if your spouse helps you with your business, you can pay them a reasonable amount for the work they do.

All children, regardless of age, are also entitled to their own personal tax and capital gains tax exemption

CHARITY Giving money to charity also qualifies for tax relief if you use tax-efficient means, such as a deed of covenant, payroll giving or Gift Aid

PENSIONS Pensions have long offered attractive tax breaks.

This means for higher rate taxpayers a contribution of pounds 100 only costs pounds 60, and for basic rate taxpayers the same contribution costs pounds 78, as the Government provides the pounds 40 and pounds 22 respectively in tax relief.

And certain elements of pension simplification which come into force on April 6 next year - A-Day - will create even more generous tax breaks for some savers.

For example, the old rules did not allow plan holders to take any tax-free cash from their pension fund when they came to take the benefits. After A-Day you will be able to take 25% of the value of the fund as a tax-free lump sum


David Elms; If you don't plan your tax affairs properly, you might as well just stuff some notes down the nearest grid
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Copyright 2005 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Features
Publication:Daily Post (Liverpool, England)
Date:Dec 12, 2005
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