Beat the taxman
lovemoney staff
Updated on
20 April 2024
The tax each person pays during their adult life will vary massively from one person to the next.
However, it is possible to look at how much Mr and Ms Average will hand back to the taxman during their time on this earth.
The Taxpayers' Alliance, a think tank, crunched all the numbers and determined an average household will pay £1.2 million in direct and indirect taxes.
This includes:
Here, we provide tax-cutting tips that you needn't feel guilty about – in fact, you should feel bad if you don't use them!
Your tax code is a series of letters and numbers that determine what your Personal Allowance is. This is how much you can earn before Income Tax kicks in.
For most people in 2024-25, their tax code will be 1257L if they have one job and no untaxed income or taxable benefits, such as a company car.
This code indicates that the taxpayer is under 65, earns less than 100,000 and so is entitled to £12,570 Personal Allowance before they begin paying Income Tax on their earnings.
You should double-check your tax code each year to make sure you aren’t on the wrong one, as you may then be paying too much to HM Revenue & Customs.
If you find that more tax has been collected than you needed to pay, claim your money back! To do this, you will need to contact HMRC in writing.
You should enclose relevant copies of forms like P60s and P45s, as well as an explanation of why you believe you are owed a refund.
You can earn 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 (additional rate earners get nothing).
Current accounts, fixed-rate bonds and regular savers, credit unions, peer-to-peer platforms, corporate bonds and Government bonds are covered by the PSA.
With rates on savings deals having increased substantially over the last year, it’s now far easier to hit the point where you start paying tax on your interest gains.
Once you've crossed the £1,000/£500 threshold, you should put your other savings in an ISA.
The Personal Savings Allowance doesn’t mean you should ditch your existing Individual Savings Account (ISA) or not bother opening one at all.
That’s because ISAs shield your savings from taxes over the long term.
The 2024/25 ISA allowance for adults is £20,000, which can be saved in a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA or a Lifetime ISA.
Children under the age of 18 also get a generous tax-free savings allowance through a Junior ISA. In 2024/25, up to £9,000 can be put away in a Junior ISA (Cash and/or Stocks and Shares).
If you’ve used up your ISA allowance for the tax year but still have some money to put away, you could try National Savings & Investment’s Premium Bonds.
Premium Bonds allow you to save from £25 up to £50,000 and offers easy access to your cash.
But they aren’t like normal savings accounts as they don’t pay a regular return on your money.
Instead, the interest that should be paid is used to fund a monthly prize draw, where bondholders can win between £25 and £1 million – or nothing at all.
Read more about how winners are picked here.
Prizes are tax-free. And what's more, deposits are 100% backed by the Treasury.
Auto-enrolment means that most workers have a pension (for those who are self-employed it's important you keep up with your pension planning).
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.
The way you get the tax relief depends on the type of scheme you belong to.
In a workplace pension, your employer will deduct your contribution before you pay tax.
Pension freedom laws introduced in 2015 allow anyone aged 55 or over to take all of the cash from their pension savings for the first time (although the age you can access your pension is expected to increase in the future).
You can then do whatever you want with it.
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.
Decide whether to cash in a Defined Benefit pension
Access your retirement savings cash-free
Older people that carry on working beyond the State Pension age 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.
When you die, Inheritance Tax is charged at 40% on the value of your estate that exceeds £325,000 (£650,000 for people who are married, in a civil partnership or widowed).
So, if you think your estate will be liable for tax, you should start making plans now to protect your wealth from the taxman and give more to the people you love.
One way is to make gifts of your money before you die (up to £3,000 per year). Leaving 10% or more of your estate to charity can also reduce your tax bill to 36%.
Extra tax relief
If you plan to pass your property on to children or grandchildren, then you should also be aware of the nil-rate band, which is worth an extra £175,000.
This band sits on top of the existing Inheritance Tax threshold, so will create an effective threshold of £500,000 for individuals and £1 million for couples in the 2024/25 tax year.
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 – but this has been reduced dramatically in recent years. For the 2024/25 tax year, it’s just £3,000.
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 24% 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.
Investors receiving dividend income can benefit from the Dividend Allowance.
Only the first £500 of dividends you receive from your investments will be tax-free.
After this tax-free allowance, you will have to pay tax at 8.75% if you are a Basic Rate taxpayer, 33.75% if you are a Higher Rate taxpayer or 39.35% if you are an Additional Rate taxpayer.
Take a look at The Dividend Allowance: what it is, how to benefit and the best share picks
The Government has finally caught up with the proliferation of eBay, Gumtree and similar sites, with 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 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.
One way to pay no Stamp Duty is to find a property for residential buyers to buy for less than £250,000 (or £425,000 if you're a first-time buyer).
Higher rates apply if your purchase is a second home or buy-to-let investment.
Read Stamp Duty explained for more information.
See which Stamp Duty threshold you fall into
You could be paying more than you need to on your Council Tax bill.
The amount households pay in England and Scotland is based on old property valuations from the 1990s, so they could be completely out of date.
As Council Tax has risen again this year, it’s a good time to try and get your band changed.
The Rent a Room scheme allows homeowners to take in a lodger and enjoy tax relief on rental income.
It means you don’t have to pay a penny in tax on the first £7,500 you make in rent each year (or half if you share the income with someone else).
Resident landlords and those that run a bed and breakfast, or a guest house are eligible to opt into the scheme to benefit from this relief.
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 £12,570 a year to transfer up to £1,260 of their Personal Allowance to their higher-earning spouse.
The Government estimates the scheme could reduce the amount of tax by up to £252 every tax year.
If you and your partner were born before 6 April 1935, you may be entitled to Married Couple’s Allowance instead of Marriage Allowance.
Here's how to claim the Marriage Allowance (if you're eligible)
You can transfer savings and investments to your husband, wife, or civil partner if they pay a lower rate of tax than you do, as they may pay more favourable Income Tax rates.
It has to be a genuine gift, so you can’t ask for it back if you break up or change your mind.
Read more tips for a harmonious (financial) relationship here.
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 the tax they’ve paid on the donation and what the charity got back when they fill out their Self-Assessment tax return.
Those who donate through a Payroll Giving scheme will donate from their gross wage or pension, so they'll pay less tax on their remaining income.
And don't forget that those who donate at least 10% of their estate in their will get a reduced Inheritance Tax rate. Read How to cut your Inheritance Tax bill for more information.
If you have to 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 31 October, while the online deadline is 31 January.
Take a look at How to get your online Self-Assessment tax return right for help getting it done on time.
Self-employed people and private landlords are allowed to 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 were also able to offset 25% of the tax on their mortgage interest and for wear and tear on their property, but the Government reduced this tax break and it ended 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.
What to do if you're an accidental landlord
How everyone working from home can claim over £300 a year back from the taxman
This one isn't strictly tax-related, but if you're paying your taxes, you may as well get something back.
Whether you're a new parent, a carer, live with someone with autism, or over 60, there are benefits you should be claiming (click the links for more information).
Some of these include tax reductions – older people with limited savings, for example, could get money off Council Tax.
Not claiming these benefits could be effectively costing households thousands of pounds, as our writer found.
Freebies and help for new parents