11 ways to pay less tax. You’re welcome.
You love paying tax, right? Hmmm. Maybe not. Here’s the good news though – there are perfectly legitimate and legal ways of paying less tax. Happy? Have a little read!
1. Use your Personal Savings Allowance
You can save up to £1,000 in interest from savings without paying ANY tax.
The Personal Savings Allowance (PSA) is applied automatically and is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
Current accounts, fixed-rate bonds and regular savers, credit unions, peer-to-peer platforms, corporate bonds and Government bonds are all covered by the PSA.
Given the low level of interest rates now, you’d need at least £20,000 in a best buy savings account to even get close to exceeding the PSA for basic-rate taxpayers, so this isn’t a solution that would work for everyone.
Once you’ve crossed the £1,000 / £500 threshold, you should put your other savings in an ISA.
2. Open an ISA
The Personal Savings Allowance doesn’t mean you should ditch your existing ISA or not bother opening one at all. That’s because ISAs shield your savings from taxes over the long term.
The 2019/20 ISA allowance for adults is £20,000, which can be saved in a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA or Lifetime ISA.
Children under the age of 18 also get a tax-free savings allowance with a Junior ISA. In 2019/20, up to £4,368 can be put away in a Junior ISA (Cash and/or Stocks and Shares). You get to pay less tax now, and your kids thank you later. What’s not to love?
3. Pay into a pension scheme
But that doesn’t mean you should be satisfied with making the lowest contributions.
When you pay into a pension scheme, you benefit from tax relief on your contributions based on the highest rate of Income Tax you pay. Plus, you can sit back and decide which luxury cruises you can take when you finally retire.
4. Don’t blow pension savings
Pension freedom laws introduced in 2015 allow anyone aged 55 or over to take all the cash from their pension savings for the first time. You can then do whatever you want with it. Wey hey!
But beware! Withdrawing your whole pot could land you with a massive tax bill.
Pension rules say you can take 25% of your pension pot as cash in one lump sum, or multiple withdrawals, tax-free.
5. Stop paying National Insurance Contributions
Older people that carry on working beyond the State Pension age (66 years old presently) don’t have to make National Insurance Class 1 and Class 2 contributions.
Make sure you stop these being taken from your wages by showing proof of age to your employer or writing to HMRC to get a letter confirming you have reached State Pension age.
6. Know your Capital Gains Tax rights
Capital Gains Tax (CGT) is payable on the profits made from selling assets like property (not your main home) and investments.
You don’t have to pay if your gains are under your tax-free allowance. In 2019/20, the capital gains you can get tax-free is £12,000.
After the tax-free allowance, CGT is charged according to your tax band.
The rate of CGT for basic rate (20%) taxpayers is 10% (or 18% on residential property) and the rate for higher rate taxpayers (40% or 45%) is 20% (or 28% for residential property).
There are lots of savvy ways to save on CGT, including using an ISA, investing in certain small businesses, making extra pension contributions, offsetting losses against gains and spreading gains over tax years.
7. Sharing economy tax relief
The Government has finally caught up with the proliferation of eBay, Gumtree and similar sites, with the launch of two tax relief schemes for the ‘sharing economy’.
The first £1,000 you make from selling your old stuff online, or items you’ve made, is now tax-free – beyond that, you’ll have to pay income tax.
Additionally, the first £1,000 you make from your property, for things like renting out your driveway, is tax-free. That’s on top of the Rent-a-Room scheme, if you’re eligible. Best get cracking with that long overdue clear out eh?
8. Get married
Ding dong the bells are gonna chime! Not something usually associated with saving money, but a wedding does come with some surprising financial bonuses. Married couples and civil partners born after 6 April 1935 may be able to take advantage of a tax break called the Marriage Allowance.
It allows a partner who generally earns less than £12,500 a year to transfer up to £1,250 of their Personal Allowance to their higher-earning spouse (providing their spouse is a basic rate taxpayer).
The Government estimates the scheme could reduce the amount of tax by up to £250 every tax year.
9. Give to charity
The Government pays tax relief on charity donations.
Both you and the charity can benefit, but it depends on how you donate.
Donating through Gift Aid means charities and community amateur sports clubs (CASCs) can claim 25p for every £1 you give back from the Government.
Higher rate taxpayers can claim the difference between their rate and the basic rate on the donation on their self-assessment tax return.
Those that donate through a Payroll Giving scheme will donate from their gross wage or pension, so you’ll then pay less tax on your remaining income.
And don’t forget that those that donate at least 10% of their estate in their will get a reduced Inheritance Tax rate.
10. Stick to deadlines
This is a pretty obvious one, but worth outlining. If you must file a self-assessment tax return, make sure you don’t miss the deadlines as you’ll be hit with an instant £100 fine, and more charges will be levied the longer you leave it.
Read What to do if you haven’t filed your tax return yet on how to limit the damage.
The deadline for paper returns is midnight on 31 October 2019, but if you choose to file online you have until midnight on 31 January 2020.
Take a look at How to get your online self-assessment tax return right for help getting it done on time.
11. Offset expenses
Self-employed people and private landlords can deduct some business expenses before paying tax on their income.
Allowable expenses for the self-employed include travel costs, the running costs of the business premises (including a home office) and buying stationery.
Meanwhile, private landlords can claim for things like agent fees, maintenance, repairs, services like a gardener, legal fees and direct costs such as phone calls, stationery and advertising for new tenants.
They can also offset 25% of the tax on their mortgage interest and for wear and tear on their property, but the Government is reducing this tax break and will end it completely in 2020.
Landlords and those that run a business can also take advantage of the Annual Investment Allowance (AIA) to claim tax back for capital expenditure on specific items.
The limit has temporarily rise to £1 million until 31 December 2020, up from £200,000.
If any of the above appeals to you but you don’t fancy the legwork, don’t forget we’re here to help. Call Advanced Accountancy today on 01384 271858 and start saving money.