Beat the taxman

Updated on 28 September 2018

20 ways to pay less tax: cut your Income Tax, Council Tax, and Inheritance Tax

Reduce your tax bill without breaking the law, by saving money on Income Tax, Council Tax, pension accumulation and withdrawal, using ISA and savings allowances, Stamp Duty exemptions and more.

How much tax you pay in your life

The amount of tax we pay has long been a contentious topic in Britain.

New research from The TaxPayers' Alliance blames Government policy for the high cost of living, calling for major changes from the top. 

It shows that over a lifetime, an average household will pay £826,030 in direct and indirect taxes, up from £804,323 the year before. This includes:

  • £287,963 in Income Tax
  • £169,371 in VAT
  • £107,045 in Employee's National Insurance Contributions
  • £65,068 in Council Tax

Here, we provide tax-cutting tips that you needn't feel guilty about – in fact, you should feel bad if you don't make use of them!

1. Check your tax code

Your tax code is a series of letters and numbers that determine what your personal allowance is. That's how much you can earn before Income Tax kicks in.

For most people in 2018-19, their tax code will be 1185L.

This indicates that the taxpayer is under 65, earns less than 100,000 and so is entitled to £11,850 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 the relevant copies of forms like P60s and P45s, as well as an explanation of why you believe you are owed a refund.

Check you're on the right tax code

Find out how to get a tax refund  

2. Use your Personal Savings Allowance

You can 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, NS&I investments, credit unions, peer-to-peer platforms, corporate bonds and Government bonds are covered by the PSA.

Given the low level of interest rates at the moment, 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.

Once you've crossed the £1,000 / £500 threshold, put your other savings in an ISA.

See what's covered by the PSA

Find a better saving account

3. Open an ISA

WThe 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 2018/19 ISA allowance for adults is £20,000, which can be saved as cash and/or as stocks and shares. 

Children under the age of 18 also get a tax-free savings allowance with a Junior ISA. In 2018/19 children can put away up to £4,260 in cash and/or stocks and shares.

Find the best cash ISAs

Comfortable with risk? Get a Stocks and Shares ISA

If you've got kids, consider a Junior ISA

4. Invest in Premium Bonds

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 Premium Bonds.

Premium Bonds allow you to save from £100 up to £50,000 and offer easy access to your cash. However, 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.

Buy Premium Bonds

Have you won? See the latest winners

Find lost and forgotten Bonds and prizes

Premium Bonds can be a way to cut your tax bill (image: NS&I)

5. Pay into a pension scheme

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).

However, 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.

Work out how much you should be contributing 

Find old pension pots

Pick the best pension fund

Small business owner? How to set up a workplace scheme

6. Don’t blow pension savings

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. 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

7. Stop paying National Insurance Contributions

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.

8. Be proactive with Inheritance Tax planning

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 yours will liable for the 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% of your estate to charity can also reduce your tax bill to 36%.

Put your affairs in order

Cut your inheritance tax bill

9. 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 2018/19 the capital gains you can get tax-free is £11,700.

After the tax-free allowance CGT is charged according to your tax band. The rate of CGT for basic rate (20%) taxpayers has been cut from 18% to 10% and the rate for higher rate taxpayers (40% or 45%) has been cut from 28% to 20%.

However, the gains made on residential property sales aren’t eligible for the new rates and the old 18% or 28% rates will still apply. For more information, read Budget 2016: landlords excluded from Capital Gains Tax changes.

But there are lots of other savvy ways to save on CGT like using an ISA, investing in small companies, making extra pension contributions, offsetting losses against gains and spreading gains over tax years. 

Set up an ISA

Look at other ways to reduce CGT

10. Take advantage of the Dividend Allowance

Investors receiving dividend income can still benefit from a reduced dividend allowance.

Previously £5,000, now only the first £2,000 of dividends you receive from your investments will be tax-free.

After this tax-free allowance, you will have to pay tax at 7.5% if you are a basic rate taxpayer, 32.5% if you are a higher rate taxpayer or 38.1% 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.

Set up a Stocks and Shares ISA

Find the right investment platform

Read the experts' weekly share tips

11. 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 (see below).

Get started on eBay

Best websites to sell different items

There's £1,000 in tax relief for selling your old stuff (image: Shutterstock)

12. Use Stamp Duty exemptions

When you buy a house in the UK you have to pay a levy to the Government called Stamp Duty Land Tax (SDLT).

Stamp Duty is tiered and charged at different rates depending on the portion of the purchase price that falls into a band and higher rates now apply if your purchase is a second home or buy-to-let investment.

Read Stamp Duty explained for more.

If you're a first home buyer, however, you now have access to extensive stamp duty tax relief.

You'll pay 0% on the first £300,000 of the properties value, then a reduced rate on the remainder up to £500,000.

However, if the property price is above £500,000 you'll have to pay the normal rate for the whole amount.

Another way to pay no Stamp Duty is to find a property for residential buyers to buy for less than £125,000. Take a look at How to beat Stamp Duty for more ideas.

See which Stamp Duty threshold you fall into

13. Challenge your Council Tax band

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 could be completely out of date.

With Council Tax rising by an average of 3% in England, it’s a good time to try and get your band changed.

Find out if you're paying too much Council Tax

Get cashback on your Council Tax bills

14. Take in a lodger

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 guest house are eligible to opt into the scheme to benefit from this relief.

Learn more about the Rent-a-Room scheme

15. Get married

Married couples and civil partners born after April 6, 1935, may be able to take advantage of a tax break called the Marriage Allowance.

It allows a partner who earns less than £11,850 a year to transfer up to £1,190 of their personal allowance to their higher-earning spouse.

The Government estimates 4.2 million households could save up to £212 thanks to the scheme.

If you and your partner were born before April 6 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)

Getting married can reduce your tax bill (image: Shutterstock)

16. Trust your partner

You can transfer savings and investments to your husband, wife or civil partner to benefit from if they pay a lower rate of tax than you do.

However, it has to be a genuine gift. You can’t ask for it back if you break up or change your mind.

Read more tips for a harmonious (financial) relationship here.

17. 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 the basic rate on the donation on their self-assessment 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 more than 10% of their estate in their will get a reduced Inheritance Tax rate. Read How to cut your Inheritance Tax bill for more.

Give to charity without paying more

Avoid rip-off charges

18. Stick to deadlines

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 midnight on 31 October, but if you choose to file online you have until midnight on 31 January.

Take a look at How to get your online self-assessment tax return right for help getting it done on time.

Get help filling in your tax return

Learn about going self-employed

19. Offset expenses

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 business premises (including a home office) and buying stationery.

Meanwhile, private landlords can claim for things like agent fees, utility bills, 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 50% of the tax on their mortgage interest and for wear and tear on their property, though the Government is reducing this particular 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 items such as tools and computers – the limit is currently £200,000.  

What to do if you're an accidental landlord

Cut your costs and fees

20. Claim the benefits you're entitled to

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). 

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

Benefits and perks for over 60s

Carer's allowance: what you're entitled to and how to claim

This guide is updated for each new tax year

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