As Benjamin Franklin stated in 1789, “In this world, nothing is certain but death and taxes”. No one likes paying tax, and whilst it can not be avoided, there are legitimate ways to reduce your tax bill by making sure that you take advantage of the tax reliefs available.
Increasing pension contributions, claiming for charitable donations made through your tax return using a salary sacrifice scheme for pension contributions, and other benefits such as a company car are just some ways to reduce your tax bill.
Additionally, switching savings into an ISA and utilising your personal allowance can also help.
This blog post will explore the most effective ways of saving tax for an individual. For company owners, you may find our ‘Save tax and draw more money out of your business‘ webinar useful.
Can you avoid paying high taxes?
Avoiding tax in the UK is illegal. However, you can reduce your annual tax bill by taking advantage of available income tax reliefs and claiming for expenses incurred.
The higher your tax rate, the higher the tax savings made through claiming these reliefs, most commonly through a self-assessment tax return.
Is it legal to pay less tax?
It is perfectly legal to pay less tax by utilising allowances such as your personal allowance, personal savings allowance and capital gains allowance. You can also claim income tax relief on contributions to your personal pension pot, charitable donations, and expenses incurred.
The UK tax system is designed for taxpayers to take advantage of tax-free allowances and to receive tax relief. However, it is not intended for tax avoidance schemes. These are normally complex arrangements marketed to save significant amounts of tax. HMRC do target these kinds of schemes, so we would always recommend taking professional advice.
Paying less tax as a higher income earner
In most scenarios, higher-rate taxpayers pay tax at the following rates:
- The first £12,570 (where total earnings are below £100,000) you are taxed at 0%
- between £12,570-£50,270, you are taxed at 20%
- between £50,270 and £100,000, you are taxed at 40%,
- between £100,001 and £125,140, you are taxed at 60%
- over £125,140, you are taxed at 45%
So the higher your earnings, the higher the tax relief on claiming for allowable tax relief and expenses. How much tax relief you gain depends on your taxable income in the tax year.
The most common allowances and reliefs to claim are:
- Maximising both your and your civil partner’s or spouse’s personal allowance
- Claiming the marriage allowance
- Personal savings allowance
- Higher rate tax relief on personal pension contributions
- Higher rate tax relief on charitable gifts and donations
- Employment expenses not reimbursed by your employer
- Utilising the capital gains annual exempt amount
- Trading allowance
How to pay more into your pension contributions
Each year you have an annual allowance of total pension contributions that can be made into your pension pot (unused allowances can be rolled forward up to three tax years).
Your financial adviser or pension provider can help with the practicalities of making an additional pension contribution, especially if you are rolling back a contribution to previous years.
A contribution of £25,140 made by an individual earning just under the additional rate tax band can provide up to £10,056 of tax relief and an additional £31,425 in your pension pot. Not only does this cut tax, but it also increases your retirement fund to which up to 25% can be paid out tax-free on retirement age.
We would always recommend talking to a financial advisor and an accountant before making an additional pension contribution.
Reduce your capital gains tax burden
If you are married, or in a civil partnership, you both have a tax-free allowance for capital gains tax that can be used yearly.
Transferring assets between spouses or civil partners incurs no tax, but timing the transfer and disposal of assets between them can result in substantial tax savings.
Invest in an ISA
Once your savings allowance has been used, then income tax is payable on income from your savings accounts. A tax-efficient savings account such as an ISA can reduce your investment tax bill.
Paying less tax as a self-employed person
The most common ways of saving tax as a self-employed person are as follows:
- Claiming all allowable business expenses.
- Maximising the tax relief on capital allowances. These are the allowances for tax relief on purchases of equipment and assets you use in your business.
- Making a pension contribution as per above.
- Registering for VAT if most of your customers are VAT registered.
Further tax relief can be obtained by reviewing the structure of your business if you are a higher-rate taxpayer and your spouse is a basic-rate taxpayer. This applies to both self-employed and property income tax. Not only can this save tax, but it can also enable you to qualify for child benefits if appropriate.
How to utilise business expenses
Self-employed individuals can claim for the expenses incurred that are ‘wholly exclusively and necessary for their trade’.
In most cases, this includes rent, travel costs, professional fees, and insurance. However, there are certain tax perks to being self-employed.
These can include:
- A proportion of some household costs if you run your business from home.
- A percentage of your vehicle costs if you use it for business, which is more beneficial than the HMRC-approved rates.
If you have no expenses to your self-employment income or rental income with no expenses, then you can claim the trading allowance.
Pay less tax as an employed person
Whilst there are fewer opportunities for tax savings as an employed person, as well as the higher rate taxpayers savings above, other common ways to pay less tax include:
- Claiming for all work-related expenses that your employer does not reimburse.
- Using a salary sacrifice arrangement, where you give up part of your salary in exchange for non-cash company benefits such as an extra pension contribution, company cars or other employee tax benefits.
How to claim tax relief on expenses related to your job
In most cases, you can complete a P87 for any work-related expenses that your employer has not reimbursed.
These can include:
- Uniform – including a washing allowance.
- Business travel.
- Professional fees.
HMRC will then calculate any income tax rebate due and adjust your tax code to claim tax relief at the source for the expenditure.
As your expenses may change each year, an incorrect tax code may often be issued, which could result in tax being under or overpaid. We would recommend that you check your tax code when you receive it. If incorrect, HMRC can issue a new tax code with the correct expenses to avoid an unexpected income tax bill.
If you claim tax relief on expenses of more than £2,500, HMRC will require a self-assessment tax return to be completed for each tax year you claim tax relief on expenses.
Get your tax on track with Spotlight Accounting
At Spotlight Accounting, we work with our clients to ensure they ultimately pay less tax.
This can be done in several ways:
- Completing self-assessment tax returns, including making a claim for tax relief where it applies.
- Looking at your business and personal situation and providing advice on the most tax-efficient way of operating.
- Undertaking a 9-month review. This service usually ensures that our clients and their spouses stay within the basic rate tax band and qualify for child benefits.
- Using our business tax review service, we can ensure that you are extracting money out of your business in the most tax-efficient way.
- Protecting your property portfolio with our property tax planning service. We can make sure that your portfolio is held in the right vehicle.
Get in touch to see how we can support you.
With one of the most complicated tax systems, paying income tax and understanding how you can pay less tax can be challenging.
At Spotlight Accounting, we suggest you seek the advice of an accountant who can help you navigate the tax system and ensure that you are taking advantage of all the tax-saving opportunities available.
To learn more about preparing for your taxes, check out our helpful blogs here: