How to Pay Less Tax in the UK — 9 Tips to Lower Your Tax Bill
Thousands of UK residents are paying more tax than they need to — and you could be one of them. Find out how to legally reduce your tax bill, and make small changes to save a lot of money.
Tax is one of life's certainties, but how much you actually end up paying depends on your circumstances. While rates are set by the government, there are plenty of completely legal ways for UK taxpayers to reduce how much they pay in tax.
From getting the most out of your personal allowance through to saving for retirement, tax planning starts with understanding your financial position. Our handy UK salary calculator tool is the perfect starting point for anyone who wants to pay less tax, and will tell you everything you need to know about your current tax liability.
Once you have a better idea of how much you're already paying, the tips in this article will help you to pay less tax and save more money.
1. Claim Tax Credits
One of the easiest ways to reduce the amount you pay in taxes is to claim tax credits. These provide extra money to people who look after children, disabled workers, and they can even help you out if you're on a low income.
If you meet the criteria for Working Tax Credit and earn below a certain level, you could get up to £2,005 in the 2021/2022 tax year. If you care for at least one child and earn less than the threshold amount, you could get hundreds or even thousands of pounds back in Child Tax Credit.
Save Money On Taxes
Everyone gets a tax-free personal allowance and you may even be entitled to tax credits. Always check your entitlement to tax relief schemes and make sure you're not paying more than you need to!
2. Use Your Personal Allowance
Everyone gets a tax-free personal allowance, which covers your salary, bonuses, and any income from your pension or rental properties. It makes sense to take advantage of your personal allowance as much as possible.
For instance, you could transfer the ownership of a rental property that you own jointly with your partner to your own name if they already earn over the threshold. The same applies to income from taxable investments — and everyone should work out how best to structure their taxes, especially if they're married or have a long-term partner.
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3. Get Refunded for Overpayments
It's important to check your payslips and to ensure that you aren't paying more tax than you need to. While HMRC should notify you if you're due a tax rebate, it's better to stay one step ahead and monitor your earnings and tax code.
For example, the amount you're paying monthly in taxes needs to be decreased if your income falls over the course of a year. This is because the HMRC bases its calculations on your personal allowance being used equally from month to month. To reclaim overpaid taxes, contact HMRC and fill in form R40.
4. Claim Employee Tax Benefits
There are certain benefits that employees can gain from their employers, so you should always stay informed about what these benefits are.
One example is subscribing to the Cycle to Work Scheme, which allows you to pay a monthly bike rental that is deducted from your salary before national insurance and income tax. Even if you are not commuting to work by bike, you may still be able to reduce your tax bill by taking out a tax-free loan from your employer to cover transport costs.
Under the tax-free childcare scheme, parents of children under 11 and who earn less than £100,000 annually can claim back 25% of their childcare costs up to £500 every three months.
Tax Tips For UK Employees
Make sure you take advantage of any tax-efficient benefits offered by your employer, and use the Marriage Allowance
if your spouse or civil partner earns less than the tax-free personal allowance.
By paying into pension schemes and savings accounts, you can reduce your tax bill while saving for your future.
5. Use the Allowances for Married Couples
If you are married or in a civil partnership, you can claim either Marriage Allowance or Married Couple's Allowance.
The Marriage Allowance can help couples to pay less in tax if one partner earns less than the tax-free personal allowance, by transferring any unused personal allowance to the partner who earns more and pays basic rate tax. In the 2021/2022 tax year, up to £1,260 worth of tax-free allowance can be transferred, making it possible to save up to £252.
If instead you claim the Married Couple's Allowance, it could save you between £353 and £912.50 in taxes every year. It is up to you to work out which of the two allowances reduces your tax bill more.
6. Save for Retirement
You can even save money on your tax bill by paying into a pension scheme. Any contributions you make to a workplace pension scheme can be taken from your gross salary, meaning the payment is made before tax is deducted.
You can get pension tax relief on private contributions worth up to 100% of your annual earnings. If you want to save even more money, it's worth knowing that basic rate taxpayers can earn up to £1,000 of tax-free interest on their savings.
7. Claim Tax-Deductible Expenses
Many business expenses can be deducted from your profits, resulting in a lower taxable income figure. To reduce your taxable profit figure, make sure you keep records and receipts of any office, property, travel, or other expenses. Tax-deductible expenses can significantly lower your overall bill.
If you are self-employed, you can benefit from the £1,000 tax-free trading allowance. However, you can only claim it if you do not also claim for tax deductions on account of expenses.
UK Self-Employment Tax Tips
UK entrepreneurs and the self-employed can claim tax-deductible expenses that reduce their taxable income. By adjusting your accounting period and structuring your payments, it's possible to save on your self-assessment tax return.
8. Change Your Accounting Period
If you have your own business, you might find it helpful to change the dates of your accounting year. While the ordinary tax year runs from 6 April to 5 April the following year, you can shorten or lengthen it.
By carefully planning your accounting year-end date around and bringing it forward from the period used by HMRC, you'll have longer to pay and your tax bill will rise more slowly in line with profits.
9. Reduce Payments on Account
Self-employed people are generally required to pay their income tax in advance over two instalments, which usually fall in January and July of each year. This means that the amount you pay is calculated based on the previous year's tax bill.
Therefore, if the income of the current year will be lower than the one in the previous year, your tax instalments may be higher than they should. You can apply to reduce your payments on account, if you expect to earn less than the year before. To do so, you'll need to contact HMRC and submit form SA303.
By following the tips outlined in this guide, you could save money on taxes and enjoy more of your salary. The best part is that all of these tax strategies are completely legal, and can help anyone to improve their financial situation by reducing the amount of income tax they pay.
To get started, simply use our UK salary calculator tool and apply the above suggestions to begin your money-saving journey today.