Are you paying more tax than you need to? Thousands of people in the UK are paying too much tax and you could be one of them. In fact, we’re paying around £12.6 billion more per year in tax than we should.
In this guide, we’ll give you some tax-saving tips to help you pay less tax in the UK. From making the most of tax-free allowances to checking your tax code, we have everything you need to know to pay less tax.
With National Insurance contributions increasing in April 2022 to pay for health and social care and other consumer goods prices rising, it’s more important than ever to know how to pay less tax.
If you’re concerned about rising taxes, particularly during a time when other household bills are increasing too, there are some perfectly legitimate ways you can pay less tax. These tax-saving tips could save you hundreds or thousands of pounds, but many people aren’t aware of them. That’s why we’ve put together this article which explains exactly how to pay less tax in the UK.
First, let’s start with how to reduce income tax. Income tax is the tax paid to the government based on your yearly income.
As of April 2021, everyone has a tax-free allowance of £12,570 – known as your personal allowance. This means that the first £12,570 of your income is totally tax-free. As soon as your income exceeds your personal allowance, you will start to pay tax on the following sources of income if applicable:
Here, we outline how to reduce your taxable income in the UK:
The first way to pay less tax is by checking you have the right tax code. Your tax code indicates how much income tax your employer deducts from your salary each month. If you have the wrong tax code, it means you are paying either too much or too little income tax.
Therefore, you should check your tax code on a regular basis, especially after a major change like a job switch, to ensure it is correct. You can find your tax code on your payslip. If you see that you are on the wrong tax code, you may be entitled to pay less tax from then on, or a refund for previous years.
Marriage allowance can help you pay less tax if you’re in a couple where one partner earns less than the personal allowance of £12,570. If a couple meets these conditions, marriage allowance allows one spouse to transfer £1,260 of their personal allowance to the other. The potential tax saving is £1,260 at 20%, which is £252.
You can apply for marriage allowance if:
A big advantage of saving for retirement is that you can pay into a pension to reduce tax. This is because, to encourage people to start saving for later life, the government pays tax relief on any pension contributions.
So when you earn tax relief on your pension, a portion of the money you would have paid in tax on your income goes into your pension pot instead. This tax relief is paid at the highest rate of income tax you pay, so basic taxpayers will get 20% tax relief. This provides a nice boost to your savings and helps your fund grow faster than most other investments.
Tax credits are designed to top up your earnings and provide some financial relief if you look after children, are a disabled worker or are a worker on low income.
There are two types of tax credits that you can claim – working tax credit and child tax credit. Depending on your household circumstances, you can claim one or both of them.
However, if you already claim Universal Credit, you cannot also claim tax credits.
According to HMRC, hundreds of thousands of taxpayers fail to file their tax returns by the deadline each year. This mistake can end up being incredibly costly despite being so easy to avoid.
If you do miss the tax return deadline, you’ll automatically earn nothing less than a £100 fine – even if you don’t owe any tax. HMRC may also start to charge additional penalties the longer you wait, so the quicker you file your tax return the better.
The date by which you have to submit your tax return depends on whether you’re doing it online or on paper – so make sure you check.
When you draw taxable cash from your pension pot for the first time, you should only have to pay your normal income tax amount. But if your pension provider hasn’t been given a tax code by the HMRC, they will have to deduct income tax using an emergency tax code.
An emergency tax code applies a ‘month one’ approach to the taxing of withdrawn pension funds. As a result, HMRC simply assumes that you’ll make the same withdrawal every month for the next 12 months.
This could mean you end up paying thousands, or even tens of thousands, in extra tax. This tax error has seen HMRC pay back over £835 million in overpaid pension tax since the reforms were introduced, according to analysis by investment platform AJ Bell.
If you need to file a tax reclaim, fill out form R40 from HMRC, or give them a call.
If you have savings, there are a few things you can do to boost your tax-free income. Here’s how to pay less tax on your savings:
If you earn less than £18,570 a year in income and savings interest combined, you might qualify for the starter savings allowance.
If you qualify for the starter rate, any interest you earn up to £5,000 is completely tax-free. This is in addition to your personal savings allowance, allowing you to earn up to £18,570 before paying any tax.
To pay less tax, you should make the most of your annual tax-free ISA allowance. This is a set amount that you can put into Individual Savings Accounts (ISAs) each tax year, without paying any tax on the money your ISAs make.
For the tax year 2022/23, you can deposit up to £20,000 into an ISA account and use it for any of the below:
Another way you can pay less tax is by taking advantage of your personal savings allowance (PSA). This is a tax-free allowance that allows you to earn interest on your savings without paying any tax on that interest.
If you’re a basic-rate taxpayer, you can utilise your PSA to earn £1,000 of tax-free interest on your savings in tax year 2022/23. If you’re a higher-rate taxpayer, you can earn £500 of tax-free interest. That means you’ll only start paying tax when your savings income exceeds this threshold.
Self-employment comes with lots of perks, but it also comes with a lot of tax challenges. But there are many ways that self-employed workers can pay less tax. Here’s how to save tax if you work for yourself:
The first way to save tax if you’re self-employed is to take advantage of the tax relief on your allowance for work-related spending. HMRC offer tax relief on a range of self-employed business expenses so understanding which ones you can claim is a great way to pay less tax. Such expenses must be exclusively for business purposes and might include:
As the owner of your own business, you can choose when your accounting year ends. If you choose an accounting year-end date earlier in the tax year, it means you’ll have more time to pay tax on your profits. This means that as your profits increase, your tax bill will rise more slowly. Also, the more time you have, the more likely you are to pay your tax bill on time.
If you use a car for your business, you can usually claim the running costs. If you also use that vehicle in your private life, you can claim a proportion of the total costs.
To do this, you’ll need to either add up all your motor expenses for the year and calculate the percentage of business miles you did, or you can claim a fixed rate mileage allowance for business travel.
If you make a loss in a single tax year, you can carry it forward and offset it against profits from a more successful year, thus decreasing your taxable income.
You can also claim a refund for any overpayments you’ve made in the last four tax years. That means if you come across something you could’ve claimed for previously, or a mistake in previous years’ tax returns, make a note and claim it back later.
Normally, anyone who is self-employed pays tax in two advance payments – once in January and once in July. The amount you have to pay is based on the previous year’s tax bill.
That means that if you expect to earn less in 2022/23 compared to the yea before, you can apply to reduce your payments on account. To do this, you’ll need to submit form SA303, either via mail to HMRC or online.
There are also ways you can save tax on property income:
If you make money from renting out a property, you have to declare your profit to HMRC and pay tax on it each year. This can add up to be a big chunk of your rental income, especially for those landlords who fall into the higher tax brackets.
Luckily, there are a range of associated ‘landlord expenses’ than can be deducted from property income tax. However, according to a survey by Home Made, approximately 42% of landlords fail to deduct all of their allowable expenses from their profit, while 20% don’t deduct anything at all.
So, if you’re a landlord, one way you can pay less tax is by ensuring you claim all your expenses when submitting your Self-Assessment tax return. These normally include:
Another option to pay less tax is to rent out your spare room. The government’s Rent-a-Room Scheme allows you to enjoy not only the extra income from the rent but also up to £7,500 tax-free each year.
To qualify for the Rent-a-Room Scheme and £7,500 in tax-free rental income, you must rent out a furnished room in your home and live in the property yourself. If two people share a property and sign up for the scheme, the amount of tax-free income is proportionally reduced according to the number of people owning the home. So they would only be able to claim £3,750 each.
If your buy-to-let property is empty for any period of time, there are ways in which you can pay less tax. First, costs such as your council tax and utilities can be claimed as landlord expenses in between tenants, but there’s a way you can potentially save even more tax – short-term lets.
It could be worth considering the option of taking on a short-term let during such void periods in order to maintain the money coming in.
Landlords often lose out when they sell a rental property simply because they don’t take full advantage of the available tax relief on offer to them. If you sell a buy-to-let property for more than you bought it, you make a ‘capital gain’ – and this may be subject to capital gains tax (CGT). But, in some cases, you might be able to reduce the amount of CGT you have to pay.
This is especially the case for landlords that own multiple buy-to-let properties, as they could reap the benefits of the 0% Capital Gains tax band every year if they decide to sell one of their homes. Currently, landlords selling a buy-to-let property stand to save £11,300 in tax.
There are also ways you can save tax on property income:
The government’s Rent-a-Room Scheme enables you to receive up to £7,500 in rent tax-free each year from a lodger. However, this is only the case if you rent out a furnished room in your home and if you live in the property too.
If two people who share a property choose to take advantage of the scheme, they can only claim £3,750 each. This is proportionally reduced according to the number of people owning the home.
If you are a landlord and rent out property, you can deduct a range of associated costs from your taxable income. This could be anything from the wages of gardeners and cleaners to ground rents and accountant’s fees.
Landlord’s can also claim tax relief on any money spent on replacing ‘domestic items’ in their furnished rental properties. For example, you could claim relief on items like beds, carpets, sofas, fridges and other white goods.
However, you should note that this only applies to items being replaced – not those purchased for a property for the first time.
If you are taking out a mortgage to buy a rental property, you can claim a 20% tax credit on the mortgage interest.
It’s only natural to want to pay less tax – especially with consumer costs rising and everyone trying to save money in one way or another.
Hopefully, these tax-saving tips have given you some ideas on how to save tax, whether it’s income tax, property tax, tax if you’re self-employed or tax on savings.