Nobody wants to pay tax; we’d all like to pay as little as possible. Whilst it is our job, as advisors, to ensure our clients are fully compliant and pay only what they need to in tax there are some perfectly legal and legitimate ways you can reduce your bill.
Pay more into your pension
If you pay more into your pension, subject to statutory limitations, you will pay less. For example, if you are earning £40,000 a year and pay an extra £1,000 a year into your pension then, effectively, only £39,000 of your £40,000 salary is ‘taxable pay’. The result is that you will pay £200 a year less.
The benefits are greater for someone who pays a higher rate of tax; someone who earns £50,000 a year, and pays £1,000 into their pension would pay £400 a year less. This means that a £1,000 pension contribution has cost just £600.
An additional rate payer at 45% could see an investment into a pension scheme of £1,000 cost only £550!
Those who are self employed, or are private landlords are allowed to deduct legitimate business expenses before tax, so if you are self employed or a private landlord then you should make sure you claim a deduction for the full amount of expenses you incur. These may include a variety of things from running a car to computer equipment.
Trust a spouse
Married couples and civil partners can save by moving savings into the name of the one who pays the lower rate of tax. For example, if one individual pays higher rate, and the other pays basic rate, you could transfer the savings into the name of the basic rate payer. So rather than potentially losing 40p for every £1 interest to tax, you would lose only 20p.
The same principle can apply to property too.
Sacrifice your salary
It may be possible to sacrifice some of your salary in return for other non-taxable benefits, such as childcare vouchers which will reduce your tax and national insurance bill. Using the example of childcare vouchers, up to £55 a week can be paid to each employee for childcare, so a basic rate tax payer would save £886 a year. With potential savings as high as this, this may well be something worth discussing with your employer.
Interest from Cash ISAs is tax free. Everyone can shelter up to £15,240 in an ISA. Not having 20%, 40% or 45% of your return eaten up by tax makes using an ISA a worthwhile thing to do. For example, a 1.6% rate is turned into 1.28% net by basic rate tax, 0.96% for a higher rate payer, or a meagre 0.88% for an additional rate payer. Over a year that tax cost £47.77 to a basic rate payer, £97.54 to a higher rate payer, and £109.73 to and additional rate payer. This won’t happen with a cash ISA paying the same rate of interest.