Give yourself some credit and stop letting the taxman help himself to £4bn a year

Some 90 per cent of Britons aren't making use of tax breaks and incentives.

Although no one would warm to the idea of giving too much of their money to the taxman, that's just what we're doing – to the tune of £4bn a year.

Nine out of 10 of us pay too much tax or miss out on valuable tax breaks, according to research from IFA Promotion (IFAP), an association representing independent financial advisers. And in many instances, some simple planning could reap significant rewards.

"Given the sustained stock market falls, coupled with poor pension fund performance and continuing low savings rates, most people cannot afford to squander the tax breaks available to them," says David Elms, chief executive of IFAP. "For some we're talking tens or hundreds of pounds, but for many the sums are far larger."

There are several reasons why so many people don't take full advantage of their allowances. Many are simply unaware of what's available, while others are foxed by the complex nature of taxation.

"Although the Inland Revenue is a lot more approachable than it used to be, I think the system mitigates against people because of its complexity," says Peter Smith, a taxation and investment specialist at IFA InterAlliance. "Most people have got so much to do that if they haven't got an IFA [or accountant] there prompting them, tax planning is something they never get round to."

He adds that the few people who religiously sort their taxes out every year, and make sure they are taking full advantage of every incentive, tend to be among the better off. Yet the less well off are more likely to appreciate an extra couple of hundred pounds a year, even if they don't have the benefit of advice from a tax expert.

In most cases, things aren't that complicated. IFAP's study reveals that £1bn is wasted each year because people fail to claim tax credits available to them. The Government has been advertising the new child and working tax credits that come into effect on 6 April, but IFAP still predicts that a similar sum will go unclaimed in the next tax year. Finding out what credits you're eligible for is very simple: just contact the Inland Revenue helpline or check its website (see below).

It's also wise to make sure you're on the correct tax code and not paying more tax than you should. If your spouse doesn't work, make sure they complete an R85 form as this allows them to claim back the tax deducted from interest earned in bank and building society accounts. It's also worth transferring savings into their name.

And since the introduction of stakeholder pensions two years ago, children and non-working parents can put up to £3,600 a year into a pension and benefit from the tax advantages. If you both work and one partner is in the lower-rate tax band, you can save tax by transferring your assets into their name.

The next step is to maximise your personal allowances. For example, each person can invest up to £7,000 a year tax-free in an individual savings account (ISA). You have until 5 April to use this year's allowance, after which you lose it.

Even if you are reluctant to invest in equities, you don't have to miss out on this benefit. One option is to open a mini cash ISA, which is as flexible as a standard savings account but with the advantage that any interest generated is tax free. You can invest up to £3,000 in any one tax year in a mini cash ISA.

Alternatively, Paul Falvey, tax partner at accountants Grant Thornton, suggests moving other investments into an ISA wrapper. For example, if you have shares that aren't tax efficient, it may be worth selling them and buying them back within an ISA.

If you need to get hold of some money, encash your least tax-efficient investments first. Nikki Foster, savings and investment manager at IFA Chase de Vere, says a lot of people don't do this but simply get rid of the one that's performed worst. She recommends holding on to personal equity plans and ISAs until last.

She also suggests maximising your pension allowance, which gives you not only tax relief on contributions, but a 25 per cent tax-free lump sum on retirement. And if you've got a life policy, ensure it's in an absolute trust. This way, when it matures, your heirs won't be liable for inheritance tax, which is charged at 40 per cent on estates over £250,000.

Contact: IFAP, www.unbiased.co.uk/taketaxaction; Inland Revenue tax credits helpline, 0845 300 3900, www.inlandrevenue.gov.uk