While the idea of doing your taxes may not excite anyone, if you set aside some quality time to get your finances in order, you can end up with some extra savings. The benefit of doing the hard work up front is that later on, you can reap the rewards and returns faster. There are lots of ways to reduce your tax bill legally, whether you’re an employee or self-employed, a landlord, investor or pensioner.
Here are some ways to pay less tax:
1. Check your tax code: Your tax code indicates how much tax HMRC will collect from your salary. You can find it on your payslip. Check your tax code each year, or after changing jobs, to make sure it’s correct for your situation. If you’re on the wrong code, you may be entitled to pay less tax in coming months, or receive a refund for previous years.
2. Claim tax creditsTax 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 credits and child tax credits. Keep in mind that you can’t claim tax credits if you already receive Universal Credit.
3. Pay into a pension scheme: 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. You can use our pension tax relief calculator to work out how much you could save.
4. Benefit from marriage allowance: 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.
5. Tax-deductible expenses: 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.
6. Self-employed car costs: 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.
7. 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.
8. 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 favourable 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.
9. Landlord’s expenses: If you rent out 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.
10. Make a charitable donation Making donations to charity is tax-free: Either yourself or the charity can claim the tax back through Gift Aid. If you pay 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.