We all hate paying tax, it’s really depressing to look at your payslip and see how much money has been deducted. But it doesn’t need to be all doom and gloom, there a lot of ways in which you can either claim back tax, or not pay it in the first place (legally).
Below you will find a range of ways to reduce your tax bill. You might learn that you can save money in ways that you never knew before.
- Check your tax code
- Make additional contributions to a pension scheme
- Use your ISA allowances
- Benefit from marriage allowance
- Take advantage of your partners’ allowances
- Claim tax-free childcare
- Buy shares through your company
- Claim work expenses
- Make a charitable donation
Check your tax code
Before you think of any ways to save on tax, the first thing you should do is check you are on the correct tax code.
Tax codes show your employer how much tax HMRC will collect from your salary, it can be found on all of your payslips. It’s important to check your tax code each year and if you change jobs, or get a second job, as mistakes can happen.
If it turns out that you are on the wrong tax code you could be entitled to pay less tax for the remainder of the tax year, or you could get a refund. All you need to do is phone up HMRC and say that you think you are on the wrong tax code, and they will investigate for you.
Make additional contributions to a pension scheme
Pensions are a great way to cut your tax bill, and there are many ways you can do this via a pension.
If you are enrolled onto a workplace pension, the easiest way for you to make additional contributions is to as your HR or finance department to increase how much they deduct from your salary. As income tax is charged after pension contributions have been taken off you are effectively reducing the amount of income that can be taxed. Another way would be to make additional contributions yourself when you are paid. If you do this and you fill in a self assessment tax return, HMRC will ask if you have made any additional contributions to a registered pension scheme. Just state how much you have contributed and you can get 20% tax relief (40% if you are a higher rate tax payer).
If you are under 75 and not drawing from your pension, you can contribute as much as you earn (up to £40,000) each tax year. You can even utilise any unused annual allowance from the past three tax years. Additionally, however, you can pay into a pension for your partner if they are not earning and under 75. They can make a pension contribution of up to £2,880 and the government will add up to £729 in basic rate tax relief.
Use your ISA allowance
ISAs are by far one of the most tax-efficient ways you can safe and invest, so them out as much as you can. Everyone has an ISA limit of £20,000 per tax year across all your ISA accounts. This means you can save or invest £20,000 per year without any fear of taxes on dividends or capital gains.
Top tip, if you max out your ISA allowance you can open one up or contribute to your spouse’s ISA as the limit is applied per person. Additionally, you can open a Junior ISA for each of your children and contribute a maximum of £9,000 per year per child. The Junior ISA limit is separate to your personal ISA allowance.
Benefit from Marriage Allowance
Marriage allowance is a great tax saving for couples where one partner earns less than the personal allowance.
You can only claim this tax benefit if you are married or in a civil partnership. You can transfer any unused personal allowance from the lower-earning partner to the higher earner. In 2020/21 you can transfer up to £1,250, giving a potential saving of £250. In order to qualify the higher earner must be a 20% taxpayer.
Take advantage of your partner’s allowances
We have already said how your partner can open their own ISA and you maybe able to benefit from marriage allowance. You could also use your partners other allowances.
Two key allowances that can be used are for capital gains and dividends. Everyone gets a capital gains allowance of £12,500 per year, and £2,000 for dividends. A great way you can take advantage of this is to transfer assets to your partner before sale, thereby doubling allowance you would have for the sale of that asset. If you own a business through a limited company, you can make your partner a shareholder and pay them a dividend up to their dividend allowance for cool tax free £2,000 of earnings.
Claim tax-free childcare
Tax-free childcare is a government scheme that pays working parents a 25% top-up on what they pay for childcare, up to a maximum of £2,000 per year when parents pay out at least £10,000. There is a set criteria which you can find here.
When you claim tax-free childcare you will need to set up an online childcare account for your child. For every £8 you pay into this account, you will receive £2 from the government in the account. This can then be used to pay your approved childcare provider. Your childcare provider must be signed up to the scheme before you can pay them and benefit from tax-free childcare.
Buy shares through your company
If the company you work for offers free shares or the ability to buy shares at preferential rates through a government approved scheme (e.g. the ShareIncentive Plan), the value of the shares bought will be exempt from income tax and national insurance. This is a form of salary sacrifice where your income tax and national insurance will be calculated after you have bought your shares.
That being said, you will still be subject to capital gains tax when you sell your shares and it goes over your tax free threshold.
Claim work expenses
If your employer doesn’t reimburse you for expenses incurred for work you can claim the total of these expenses on your tax return. You can claim tax relief on the cost of repairing or replacing small tools you need to do your job, additionally, for cleaning, repairing or replacing specialist clothing such as a uniform or safety boots.
You can’t claim tax relief on the initial cost of buying small tools or clothing for work, only replacing or repairing. Also, you can’t claim tax relief for PPE. If your job requires you to use PPE your employer must either give you PPE free of charge or reimburse you the costs of purchase.
If you work from home on a regular basis, either for all or part of the week, you can claim tax relief for additional household costs. This includes if you have to work from home because of Covid-19. You can either claim tax relief on £6 a week from 6 April 2020 (£4 a week for previous years), or the exact amount of extra costs you’ve incurred above the weekly amount – you will need to have evidence such as receipts, bills or contracts.
You will get tax relief for working from home based on the rate at which you pay tax. For example at the 20% tax rate you would get £1.20 per week in tax relief based off £6 a week. This is £62.40 for a whole year.
Make a charitable donation
To save tax on charitable donations you must either donate through your payroll or claim back through your tax return. If you donate through your payroll it will be deducted from your pay before it is taxed, therefore lowering your tax bill. If you donate post-tax money then you can claim tax relief through a tax return at the rate of income tax you pay.
None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.