How to pay less tax
There are lots of ways to reduce your tax bill legally, whether you're an employee or self-employed, a landlord, investor or pensioner.
We explain how simple checks could boost your take-home earnings with minimal effort, and how to take advantage of tax reliefs and government schemes.
Here are 30 simple tips and tricks that can help you cut your tax bill to put more pounds in your pocket.
- Get a head start on your 2018-19 tax return with the Which? Tax Calculator. Tot up your bill, get jargon-free, money-saving tips and submit your return direct to HMRC.
Reduce your income tax
Let's start with five of the most simple ways to save tax on your earnings.
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. Find out the most common ones in our guide to understanding your tax code.
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 credits
Tax credits provide extra money to those looking after children, disabled workers and other workers on low incomes.
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. Up to £1,250 can be transferred in 2019-20, potentially saving you up to £250.
To qualify, the higher earner must be a 20% taxpayer. Try our quiz to see if you're eligible for marriage allowance.
5. Meet the tax return deadline
If you're one of the 12m people who need to submit a self-assessment tax return, make sure you don't miss the deadline - it's a costly and easily-avoided mistake.
For online submissions, you have until 31 January 2020 to send in your 2018-19 return. But if you want to file on paper, you'll need to submit by 31 October 2019.
Miss the deadline and there's an automatic £100 fine - even if you don't owe any tax.
- Use the Which? tax calculator to tot up your return and submit direct to HMRC.
6. Reclaim overpaid taxes
If you are a non-taxpayer, or your income unexpected falls during a year, you may find that you've been taxed more than you should have done, as HMRC assumes your personal allowance is equally used each month.
To reclaim, fill out form R40 from HMRC, or call them.
Employee tax benefits
7. Get a 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.
8. Claim tax-free childcare
Under the tax-free childcare scheme, you can claim back 25% of your childcare costs, up to £500 every three months. You'll have to meet set criteria, including having a child under 11 and earning less than £100,000.
Alternatively, your employer may be will to start up a salary sacrifice childcare scheme. These are easy to establish and can result in substantial savings for both employees and employers.
9. Get a company car
If you are entitled to a company car, consider whether it would be more tax-efficient to take a cash equivalent in pay instead.
10. Switch to a low-emission car
If you are changing your company car, consider a low-emissions model . These are now taxed at a lower percentage of their list price than cars with a high CO2 rating.
Cut tax on your savings
11. Maximise your personal savings allowance
In 2019-20, 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. If tax is due, you'll need to pay it via self-assessment or have it deducted via PAYE.
Keep in mind that you won't have a savings allowance as an additional-rate (45%) taxpayer.
12. Make the most of your Isa allowance
Everyone can take advantage of their annual tax-free Isa allowance. For the 2019-20 tax year, you can deposit up to £20,000 into Isa accounts.
This can all be put in a cash Isa, all in a stocks and shares Isa, or split between both cash and stocks and shares. We explain how this works in our guide to tax on savings and investments.
13. Use the starter rate for savings
If your income from a job or pension is below the £12,500 in 2019-20, but you earn income through interest on savings, you may also qualify for the starter savings allowance.
Any interest you earn up to £5,000 is tax-free. This will be in addition to your personal savings allowance, meaning you could earn as much as £18,500 before paying tax.
Pay less tax if you're self-employed
People who work for themselves can benefit from a range of tax perks. Not sure if you're self-employed? Check HMRC's definition of self-employed in our guide.
14. 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.
Find out what types of expenses you can claim in our guide to tax-deductible expenses
15. 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.
16. 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.
17. Annual losses
If you make a loss in one tax year, you can carry it forward and offset it against profits from a more successful year. This decreases your taxable income.
You can find out more in our guide to paying tax when self-employed.
18. 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 2018-19 than in the year before, you can apply to reduce your payments on account. You'll need to submit form SAS303, either online or via mail to HMRC.
Cut your investments tax bill
19. Dividend allowance
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. You can find out more in our dividend tax guide.
20. Capital gains tax (CGT) allowance
Capital gains is the profit you make from selling certain investments, including second homes, art, antiques and shares.
Capital gains of up to £12,000 are tax-free in 2019-20. Married couples and civil partners who own assets jointly can claim a double allowance of £24,000.
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. For more details, see our guide on capital gains tax allowances and rates.
21. No CGT on shares held in an Isa
You won't pay capital gains tax when you sell shares or units held in an Isa.
We explain everything you need to know in our guide to tax on savings and investments.
22. 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.
23. Junior Isas
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 £4,368 in 2019-20, up from £4,260 in 2018-19.
24. Switch to capital-boosting investments
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.
25. Invest with an 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 buill for the year. The amount you can invest in any given year is £1 million - potentially saving up to £300,000 in income tax.
You can find out more in our guide to equity crowdfunding.
our guide to equity crowdfunding.
26. Make the most of 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.
27. Buy shares through your company
If your employer offers free shares or the right to buy shares at a preferential rates through a government-approved scheme, such as the ShareIncentive Plan, Company Share Option Plan or Enterprise Management Initiative Scheme, the value of shares is exempt from income tax and National Insurance.
However, it's not entirely tax-free. You'll likely need to pay capital gains tax when you eventually sell your shares.
Save on property income tax
28. Use the Rent-a-room relief
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 amount of people owning the home.
29. 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. Find out what else you can claim in our guide to expenses and allowances landlords can claim.
30. 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.
Which? Mortgage Advisers can find and arrange the best deal for you.
31. Tax relief on your buy-to-let mortgage
When you take out a mortgage to buy a rental property, you can claim tax relief on the interest you pay.
However, this is gradually being phased out, and replaced with a 20% tax credit on mortgage interest. While basic-rate payers won't see a difference, higher- and additional-rate payers will pay more.
Our video explains how this works. You can also find out more in our guide to mortgage interest tax relief.
32. 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 eighteen months of ownership. The rules are complicated, but we explain how they work in our guide to capital gains tax on property.
Tax savings for older people
33. National Insurance
You won't need to keep making National Insurance contributions if you carry on working beyond state retirement age (currently 65).
So make sure your employer is aware of this and adjusts your pay.
34. Cut a future inheritance 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.
You can find out more in our guide to inheritance tax on gifts.
Charity tax savings
35. 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.
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.