Year after year, some wealthy individuals have used legitimate reliefs to pay little or no tax, according to the Treasury.HERE THEY ARE

 

Chancellor George Osborne has claimed that he was "shocked" by the extent to which these high-income individuals have used the system.

Some accountants and commentators have questioned whether he should be so surprised, as many of these schemes have been around for years.

Remember, tax avoidance - unlike tax evasion - is perfectly legal, so it is up to the government to change the rules to make these people pay more in tax.

So, what are the most common forms of tax avoidance?

The BBC News website asked two experts to pick out some of the most common avoidance schemes: Ronnie Ludwig of Saffery Champness Accountants and John Whiting of the Chartered Institute of Taxation, who also advises the government on tax simplification.

Tax reliefs

Wealthy individuals have a lot of disposable income - money that is not needed to heat the house, feed the children, or pay the council tax bill.

This income can be invested in things that lead to a reduction in the amount of tax they have to pay.

For example, this income can by pumped into an individual's pension scheme, up to a certain limit, or into schemes that are aimed at allowing businesses to thrive.

The latter - known as Enterprise Investment Schemes - are designed to encourage wealthy people to invest in new businesses that appear to have good ideas, but could be risky investments.

Banks may not be willing to take the risk these days, but wealthy people are encouraged to do so because they receive tax relief on the chunk of their own income that they put in and also pay little or no tax on any return they get out if the business is successful.

Some of these schemes already have a limit on how much income people can invest and get tax relief on.

Others do not, such as giving a chunk of their income to charity, or possibly donating a chunk of their companies' shares.

Some people may choose to give some of their income to charity, rather than the state. As with some reliefs they may not benefit directly as individuals, but it may mean the government does not gain as much in tax as it might expect, as the charities would benefit instead.

From April 2013, there will be a cap of 25% of incomes (or £50,000, whichever is the greater) for income tax relief, available on a range of methods, such as charitable giving, which do not already have caps.

People can still give more to charity - but would not get income tax relief on the rest of their donation.

Another well-known ploy, available to anyone, is to insure their lives, and write this policy into a trust for their children, so the money passes straight to them without paying inheritance tax. However, for somebody approaching later life, the premiums on such a policy are likely to be expensive.

Employing a husband or wife

Again, this is a perfectly legitimate thing to do, for those who have their own business.

Many small businesses might survive only because the owner's husband or wife is prepared to do a lot of work behind the scenes for relatively little pay.

However, some wealthy businessmen and women have employed their husband or wife, who pay little or no tax previously. They might do very little work, but are paid a salary.

This means that the couple divides its income tax bill, rather than one of them - who might be the boss of the company - getting all of the income and so paying a larger amount in tax.

The benefit is that each get a tax-free allowance for the first chunk of income. If only one of them took all the income, he or she might also be pushed into a higher tax bracket.

The couple may also pay less tax by sharing ownership of the company and paying themselves a dividend, rather than salary - something that governments have also tried to crack down on.

Artificial losses

Again, this is something that governments have taken steps to try to stop.

Effectively, a business is creative with the books and makes unnecessary transactions to contrive artificial losses.

These appear to be losses on paper, which can then be offset against income for tax purposes.

Actually they do not result in a loss in cash terms, but do allow the business and its owner to benefit from a lower tax bill than would otherwise be the case.

The chancellor wants to strengthen existing rules against this and similar schemes by introducing a General Anti-Avoidance Rule (GAAR).

This would act as blanket legislation to allow the taxman to differentiate between what counts as responsible tax planning and what is abusive tax avoidance.