Tax is likely to be the single biggest expense you’ll ever pay. Reducing your tax bill is the easiest way to make your money go further. With the top rate of income tax at 45%, making even minor improvements to your tax position is going to save you a lot of money.
In the UK, your first £12,570 of earnings is not subject to any income tax. This is a valuable tax break. If your spouse or civil partner does not have sufficient income to fully utilize their personal allowance, you could transfer income-generating assets to them so that the future income is either tax-free in their hands or charged at a lower rate.
Income tax is the tax you pay on income from employment. It ranges from 0% to 45%, depending on how much you earn. You also pay income tax on any dividends you receive and any interest from savings.
Capital gains tax is the tax you pay when you sell something for a profit, like a second property or an investment. It ranges from 10% – 28%, depending on how much profit you make.
Inheritance tax is the tax paid by your estate when you die. This is a flat rate of 40%.
There are lots of other ways to minimize tax, whether you’re an employee or self-employed, a landlord, investor, or pensioner.
- Personal Allowance – tax-free up to £12,570 p.a.
- Marriage Allowance – reduce tax bill up to £250 p.a.
- Personal Saving Allowance – savings up to £1,000 p.a.
- Savings Rate Band – up to £5,000 p.a.
- ISA Allowance – free income & growth up to £20,000 p.a.
- Dividend Allowance – tax-free up to £2,000 p.a.
- Capital Gains Tax Allowance – tax-free investment gains of up to £12,300 p.a.
- Pension Carry Forward – tax-free growth up to £120,0000 p.a.
- Venture Capitalist Trusts – tax relief & tax free growth on up to £200,000 p.a.
Tax credits provide extra money to those looking after children, disabled workers, and other workers on low incomes.
The two main types you can claim working tax credit and child tax credit.
People on tax credits with be moved to Universal Credit by 2024. You can apply sooner, but keep in mind that you can’t claim tax credits if you already receive Universal Credit.
Contributions to your employer’s pension scheme (including any additional voluntary contributions you make) can be made from your gross pay before any tax is charged.
The government will top up your pension with tax relief, giving you a free bonus for saving for retirement.
A marriage allowance is a tax perk that benefits couples where one partner earns less than the personal allowance.
If you’re married or in a civil partnership, you can transfer any unused personal allowance from the lower-earning partner to the higher earner. Up to £1,260 can be transferred in 2022-23, potentially saving you up to £250. To qualify, the higher earner must be a basic-rate taxpayer.
Season ticket loan
Some employers will offer you a tax-free loan to buy your season ticket, potentially saving you hundreds on travel costs. Ask your employer if they’re part of the scheme.
Under the tax-free childcare scheme, you can claim back 25% of your childcare costs. To get started, you’ll need to set up an online account, which can be used to manage payments to your childcare provider. For every £8 you deposit, the government will pay in £2, up to the value of £500 every three months, or £1,000 if a child is disabled.
You’ll have to meet set criteria, including having a child under 11 and earning less than £100,000.
Buy electric car
If you are changing your car, consider a low-emissions model or electric car. These are now taxed at a lower percentage of their list price than cars with a high CO2 rating. The tax rate for company cars will be frozen at 2022-23 levels until the end of 2024-25. HMRC is yet to announce rates for April 2025 onwards.
Personal savings allowance
In 2022-23, you can earn £1,000 of interest on savings tax-free if you’re a basic-rate taxpayer. If you’re a higher-rate taxpayer, your tax-free allowance is £500.
You’ll only pay tax on savings income that exceeds this threshold.
This will no longer be deducted automatically by the savings provider.
Keep in mind that you won’t have a savings allowance as an additional rate (45%) taxpayer.
Everyone can take advantage of their annual tax-free Isa allowance. For the 2022-23 tax year, you can deposit up to £20,000 into Isa accounts. This is unchanged from 2021-22.
This can all be put in a cash Isa, a stocks and shares Isa, or split between both cash and stocks and shares.
Many expenses incurred while running your business can be deducted from your profits, reducing your overall tax. This could include things like fuel, phone costs, or running costs for your home office.
You can generally claim the running costs of a car you use for business (though not the cost of buying one). If you use the same car in your private life, you can claim a proportion of the total costs.
To do this, you’ll need to either add up all of your motor expenses for the year and work out the percentage of business miles you did, or you can claim a fixed rate mileage allowance for business travel.
Cash-flow boost for self-employed
As a business owner, you can choose when your accounting year ends – and it’s worth choosing carefully.
If you pick an accounting year-end date earlier in the tax year, 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. The more time you have, the less likely you’ll struggle to pay your tax bill on time.
Payments on account
Generally, self-employed people will be required to pay tax in two advance payments – in January and then July. The amount you’ll pay will be based on the previous year’s tax bill.
So, if you expect to earn less in 2022-23 than in the year before, you can apply to reduce your payments on account. You’ll need to submit form SA303, either online or via mail to HMRC.
Each year, you can earn a certain amount of income from dividends before paying tax.
This was reduced on 6 April 2018 – but you can still earn up to £2,000 in dividend income without paying tax each year.
Capital gains tax (CGT) allowance
Capital gains are the profit you make from selling certain investments, including second homes, art, antiques, and shares.
Capital gains of up to £12,300 are tax-free in 2022-23. Married couples and civil partners who own assets jointly can claim a double allowance of £24,600.
Remember, if you don’t use the allowance within the tax year, it’s lost forever. You can’t add your tax-free allowances together for different years.
This chart explains the rate of capital gains tax you will pay as a basic-rate and higher-rate taxpayer.
Transfer assets to your spouse
You won’t be charged capital gains tax if you transfer assets to your spouse or civil partner – and a lower-earning spouse may pay more favorable income tax rates.
So, it may be worth transferring savings and investments to your husband, wife, or civil partner if they pay a lower rate of tax than you do.
When making gifts to your own children, you can avoid paying tax on the interest by paying into a junior Isa.
The annual allowance for Junior Isas is £9,000 from 2022-23.
If your investments held outside an Isa are generating a substantial income, higher- and additional rate taxpayers might be able to cut their bill by switching to investments targeting capital growth.
As well as the annual capital gains allowance (£12,300 in 2022-23), you may benefit from lower tax rates. Higher-rate taxpayers pay 20% on capital gains, but 33.75% on dividend income.
Enterprise Investment Scheme
To encourage investments in early-stage businesses, the government offers extra tax relief on some investments.
If you buy shares in a qualifying company, typically through crowdfunding investment sites like CrowdCube or Seedrs, you’ll be able to deduct 30% of your investment from your income tax bill for the year. The amount you can invest in any given year is £1 million – potentially saving up to £300,000 in income tax.
Venture Capital Trusts
Similarly, Venture Capital Trusts (VCTs) also offer 30% tax relief, but only on investments up to £200,000. VCTs are a specialist type of investment trust, meaning the investments are managed by a fund manager, rather than chosen yourself.
To qualify for the relief, you’ll need to buy the shares at launch, and hold them for at least five years.
The Rent-a-Room scheme allows you receive up to £7,500 in rent each year from a lodger, tax-free. This only applies if you rent out furnished accommodation in your own home, and you’ll need to live in the property as well.
If two people who share a property take advantage of the scheme, they can only claim £3,750 each. This is reduced proportionally according to the number of people owning the home.
If you rent out a property, you can deduct a range of costs from your taxable income.
These include the wages of gardeners and cleaners, letting-agency fees, ground rents and service charges, accountant’s fees and landlord insurance.
Landlord’s replacement of domestic items
Landlords can claim tax relief on money spent to replace ‘domestic items’ in their furnished rental properties.
The types of items you can claim relief on include beds, carpets, crockery or cutlery, sofas, curtains, fridges, and other white goods.
But this only applies to items being replaced – not those bought for a property for the first time. You can also only claim the amount for a like-for-like replacement.
When you take out a mortgage to buy a rental property, you can claim a 20% tax credit on mortgage interest.
Reduce CGT on a rental property
Landlords are normally liable for capital gains tax when they make a profit from selling a rental property.
However, if the property has been your main home at some time in the past, you can claim tax relief for the last nine months of ownership.
You won’t need to keep making National Insurance contributions if you carry on working beyond state retirement age (currently 66 for both men and women).
So make sure your employer is aware of this and adjusts your pay.
Tax bill with gifts
Gifts aren’t counted towards your inheritance-tax bill if you live for a further seven years after making them. Known as potentially exempt transfers (PETs), a gift from your estate can reduce your bill significantly.
What’s more, you can give away up to £3,000 each year without ever having to worry about the potential tax, as well as multiple smaller gifts of £250, providing they don’t go to the same person.
Charity tax savings
Making donations to charity is tax-free. Either yourself or the charity can claim the tax back through Gift Aid. If you pay a higher or additional rate tax, you can also claim back the difference to the basic rate on any Gift Aid donations.
To do this, you need to claim on your self-assessment tax return or ask HMRC to adjust your tax code.
As a basic rate taxpayer, a £1.25 donation will cost you a pound. For higher rate taxpayers, you’ll pay just 75p. Keep records showing the date and amount you have donated.
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