How to cash in on Britain’s Bonkers tax rules

From baffling childcare perks to illogical death duties . . .

once, it can push you into a higher bracket. In the worst case, you could breach the £100,000 limit where the personal allowance starts to be withdrawn.

For example, if you had built up £ 100,000 in a pension, then £25,000 would be tax-free. If you took the other £75,000 as one lump, it would be added to your income for the year.

Let’s assume you’d earned £15,000 in the year you retire but are not yet taking a state pension.

By taking the £75,000 pension, you’d boost your income to £ 90,000 for the year — so you’d become a 40 pc taxpayer and lose £ 24,000 tax on your pension.

You can avoid this by taking the pension gradually over several tax years. If this pension were taxed at basic rate, not higher rate, you’d be £9,000 better off.

There’s another anomaly. If you were to withdraw, say, £5,000 in a single month, then HMRC would assume you were planning to do the same every month and tax you accordingly. That means you could pay 40 pc tax on the withdrawal and have to claim back the excess tax.

UNFAIR DEATH TAX POLICIES

LAST year, the Treasury took £4.8 billion in inheritance tax (IHT)— £1 billion more than two years previously. The rate is a punishing 40 pc on all assets above a nil rate band — and the way it is applied appears almost random. In January, Chancellor Philip Hammond ordered a review of the fiendishly complex IHT rules. For now, everyone has a nil rate band of £325,000. Spouses and civil partners can combine this to a tax-free £650,000. They can also leave as much as they like to each other without owing IHT. There is also a main residence allowance, which currently stands at £100,000 per person. This would allow a married couple or civil partners to leave up to £850,000, while a single person owning a home could leave £425,000. But the residence allowance only applies to those who leave money to ‘direct descendants’ including adopted, step and fostered children.

Mr Falvey says: ‘If you do not have direct descendants, the relief is not available which is unfair and irrational.’

Here are the consequences of these rules for homeowners leaving assets of £500,000:

A SINGLE parent would have an allowance of £425,000, leaving children facing a tax bill of £30,000.

CHILDREN of married couples or civil partners would have no IHT bill.

A SINGLE person with no children who wanted to leave money to a niece or nephew would leave a £70,000 tax bill.

The situation will become more egregious as the residence allowance is increased towards £175,000 by 2020, giving married parents a potential £1 million allowance while childless couples will still have just £ 650,000 between them, or £325,000 if they remain single.

This residence allowance starts to be withdrawn once joint assets exceed £2 million.

The best way to avoid the IHT trap is to give away money in your lifetime and then to stay alive for a further seven years, by which time the gifted cash will fall outside of your estate.

COST OF VICES QUICKLY ADDS UP

WHILE some spending taxes are focused on sins, others appear downright daft.

on a typical £ 8.50 pack of cigarettes, you pay £6.98 tax. So a 20-a- day habit could cost you £3,102.50 a year, of which £2,547.70 would be tax, including tobacco duty and VAT.

on a pint of beer, you might typically pay around £1.20 in tax. Money Mail’s sister website

thisismoney.co.uk has a vices calculator so you can see how much less tax you could pay by changing your habits.

Then there’s VAT — the tax which appears to have been decided at the Mad Hatter’s tea party. Besides the gingerbread man example, plain biscuits and Jaffa cakes don’t attract the tax.

There’s no VAT on physical books and newspapers, but you are taxed when you buy a book on your e-reader. So use your local bookshop — and help to keep the High Street thriving.