Avoid costly tax mistakes
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Find out more4 mistakes to avoid when trying to lower your tax bill
HMRC's income-tax revenue has risen 53% since thresholds were frozen in 2021
Matthew is an award-winning journalist, specialising in savings, tax and insurance.
HMRC took more than £23bn in income tax last month alone, up 10% compared with last year and 53% more than five years ago.
Frozen tax thresholds since 2021 have helped to drive the increase, with more people pushed into a higher tax band as wages have risen. With the freeze not due to end until 2031, it's important to look for ways to cut your bill.
Rushing tax planning, however, means you could miss an opportunity or make an error that sees you paying more than you need to. Here's our pick of the top four mistakes you should avoid.
1. Saving too much outside an Isa
A portion of returns from savings interest is shielded from tax thanks to the personal savings allowance (PSA). That stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers don't have a PSA, meaning all their savings interest is subject to income tax.
Any interest that exceeds your PSA will be charged at your usual rate of income tax (20%, 40% or 45%). But from 2027, income tax on savings interest will rise by two percentage points. A basic-rate taxpayer will therefore be faced with a 22% charge, higher-rate taxpayers will pay 42%, and those in the additional-rate tax band will pay 47%.
An Isa is a great way to protect your savings interest or investment income from tax.
You can put up to £20,000 in a cash and/or stocks and shares Isa, and any income generated can grow completely tax-free, protecting your savings now and in the future.
Although the cash Isa limit for savers under 65 will fall to £12,000 from April 2027, the overall Isa allowance will remain at £20,000. That means anyone wanting to use their full Isa allowance will need to invest at least £8,000 in a stocks and shares Isa.
- Find out more: best cash Isa rates
2. Not claiming the right business expenses
Self-employed workers can claim tax relief on business-related expenses via self-assessment. This means that you can deduct the cost of 'allowable' business expenses from your taxable profit, offsetting some of the tax you'll need to pay.
Knowing what you're allowed to claim can be complicated, however, and it's easy to misunderstand the rules.
For example, you can claim for expenses such as uniforms or tools. If you work from home, you may also be able to claim some of your household costs, as well as business phone calls.
However, you can't claim for things that you use for both private and business use, such as rent or broadband access. Nor can you claim for regular commuting costs, such as your train ticket to and from your usual place of work.
You can, however, claim back travel costs for business trips – for example, going to a conference or client meeting. If you use a car for business, you may also be able to claim back running costs (petrol, car tax, insurance, repairs and servicing).
- Find out more: self-employed expenses you can claim
3. Neglecting higher-rate pension relief
One of the most common ways to reduce income tax is by contributing to a workplace or personal pension scheme. A basic-rate taxpayer, for example, will get 20% tax relief on the money they put into the pension pot. So if you pay in £100, it would actually cost you only £80.
It’s a little more complex if you're a higher or additional-rate taxpayer, and the extra effort needed to claim may put some savers off. But the legwork involved is worth it for the potential savings.
It works like this. If your pension uses relief at source, your provider will claim the basic rate of 20% tax relief for you, but you will have to claim the remainder (20% for higher rate or 25% for additional rate) by filing a self-assessment tax return.
For example, say you earn £60,000 a year, putting you into the higher-rate band. By contributing £10,000 to your pension, you will get 20% (£2,000) relief automatically, and you can claim another 20% in your tax return. As a result, the total cost to you will be just £6,000.
- Find out more: tax relief on pension contributions explained
4. Overlooking allowances for couples
If you're married or in a civil partnership, you may not realise that tying the knot gives you access to a number of tax perks. But it's up to you to claim.
Marriage allowance is a tax perk for couples who are married or in a civil partnership. It allows a person to transfer £1,260 of their personal allowance to their partner who earns more than they do. That amount is then effectively added to the higher earner's personal allowance.
To be eligible, one partner must be a non-taxpayer – in other words, earning less than the personal allowance (£12,570) – and their spouse must be paying the basic 20% rate of tax. This means they earn less than £50,270. Income tax rates and bands are different in Scotland, where the higher-earning partner must earn less than £43,662.
You'll save up to £252 in tax in 2026-27 – but it's also possible to backdate your claim for up to four tax years, provided you were eligible during those periods.
There's also the married couple's allowance (MCA), which allows you or your spouse to reduce a tax bill by up to 10%, but this applies only to couples where one or both partners were born before 5 April 1935.
Finally, if your partner has an unused personal savings allowance, cash could be held in their name instead. Or, if one of you is a lower-rate taxpayer, it might make sense for them to have the bulk of the non-Isa savings so you pay a lower tax rate on the savings interest.
- Find out more: marriage allowance and MCA explained
