If you’re one of the many people that are worried about rising taxes and wondering how to avoid tax legally in the UK, you’ve come to the right place. In this guide, we’ll share some tips on how to make full use of the tax perks and become more tax-efficient.
Let’s dive in.
Can you get away with not paying taxes in the UK?
All Uk citizens are legally required to pay some form of tax. If you’re employed, you must pay income tax which ranges from 0% to 45%, depending on how much you earn. However, most people qualify for a personal allowance which is an amount of income you can earn each year without paying tax on it. Income tax is also paid on any dividends you receive and any interest on savings.
If you sell a second property or an investment for profit, you’ll be charged capital gains tax which ranges from 10% to 28%, depending on the profit you’ve made.
Furthermore, there is an inheritance tax which is paid by a person’s estate when they die, and it’s a flat rate of 40%.
There are ways to legally avoid paying tax or reduce your tax bills with some careful tax planning, however, concealing information from the tax authority so that you don’t pay the tax you owe may result in you being charged interest and penalties on top of your tax bill.
In more serious cases, such as tax evasion, there are financial penalties, as well as a risk of a prison sentence of up to 7 years depending on the severity of the evasion.
How to pay less tax in the UK
Regardless of whether you’re an employee, self-employed, a pensioner or an investor, there are many legitimate ways to cut the amount of tax you pay. Here is a list of potential tax savings ideas that are definitely worth considering.
How to reduce income tax in the UK?
- Check tax code – One of the simplest ways to reduce your income tax is to ensure that your tax code is correct. This code shows how much tax the HMRC will deduct from your salary, and you can find it on your payslip. It’s important to check your tax code regularly, especially after switching jobs, because if the amount of income you earn each year is under the personal allowance threshold, which is £12,570, you don’t need to pay tax, and you may be entitled to a refund for previous years.
- Utilise a pension scheme – Pension tax relief can also be quite valuable, as when you pay into your pension, part of the money that would’ve gone to the government as tax is instead going towards your pension. This way, you can reduce the amount of tax you pay and boost your savings for retirement. The tax relief depends on the rate of income, thus, if you’re a higher-rate taxpayer, you can claim an additional 20% or 25% tax relief not claimed by your scheme.
- Marriage allowance – Another way to pay less tax in the Uk is to claim a Marriage Allowance. This is a tax perk for married couples or couples that live in a civil partnership, where one of the partners earns less than the standard Personal Allowance, and the other one is a basic rate taxpayer. The lower-earning partner can transfer up to £1.260 of their allowance to their partner and potentially save up to £250.
- Tax return deadline – If you need to send a self-assessment tax return, make sure not to miss the deadline because it can result in you being charged a fine of up to £1000. If you’re submitting your tax return online, you have until 31 January 2023, but if you’re planning to file on paper, the deadline is 31 October 2022.
- Reclaim overpaid taxes – If you’ve paid too much tax on a paycheck from your job, on pension payments or Self-assessment tax return, you may be able to claim a tax refund by filling out form R40 from HMRC or by calling them.
How to pay less tax as an employee?
- Get a season ticket loan – Many employers offer the season ticket loan scheme to their employees. The season ticket loan is an interest-free loan that can help employees to cover the cost of travelling, as well as parking costs. The loan repayments are paid monthly through the employee’s salary over a set period of time.
- Claim tax-free childcare – With the Governments’ tax-free childcare scheme, you can claim up to £2.000 for each one of your children and use it towards childcare costs, including nurseries, childminders and after-school clubs. The scheme is available to parents that have a child at the age of 11 or under, and each of them earns a minimum of £152 per week but less than £100.000 per year. Those who qualify will need to set up an online account on which, for every £8 they deposit, the government will pay £2. The maximum government top-up is £500 every three months or £1.000 if the child is disabled.
- Get a company car – If you use a company car for business, you may be able to claim tax relief on the money you’ve spent on fuel for business trips. If your employer reimburses some of the money, you can get relief on the difference. Bear in mind that if your car or fuel details change, you’ll need to inform HMRC to update your tax code, so you pay the correct tax.
- Switch to a low-emission car – You pay tax on the value of the company car, which is reduced if the car has low CO2 emissions, thus, if you’re planning on changing your company car, you should definitely consider a low-emission model.
How to cut taxes on savings?
- Personal savings allowance – Your personal savings allowance is a tax-free allowance that allows you to earn interest without having to pay taxes. In 2022-23 basic rate taxpayers can earn up to £1.000 in savings interest per year with no tax, while higher rate taxpayers have a tax-free allowance of £500. Keep in mind that additional rate taxpayers do not get a personal savings allowance.
- ISA allowance – You can make the most of tax-free savings and investments by using your annual ISA allowance. ISAs are tax-efficient accounts that allow you to invest up to £20.000 ( for 2022-23) in stocks and shares or cash ISA and grow your income tax-free.
- Use the starter rate for savings – If your earnings are less than £12.570 in 2022-23, you may qualify for the starter savings allowance, which allows you to get up to £5.000 and not have to pay tax on it. This means that along with your personal savings allowance, you can earn as much as £18.570 tax-free. If your income from wages or pension is £17.570 or over, you are not eligible for the starting rate for savings.
How to reduce tax bill as self-employed?
- Tax-deductible expenses – If you are self-employed, it’s important to know what you’re allowed to deduct each year so you can save on tax and make your business more profitable. Generally, you can deduct business expenses such as internet and phone bills, home office expenses or fuel costs. Furthermore, it is vital to know how to fill out the self-assessment tax return correctly to pay the correct amount of tax.
- Self-employed car costs – If you use your car for business drives, the expenses on those drives are tax deductible, so you’ll need to make sure to keep records of the dates, mileage and purpose for those trips. You can calculate the deduction by using the standard mileage rate, which is 58.5 per mile in 2022, or you can use your actual motor expenses for the year.
- Cash-flow boost for self-employed – Self-employed workers have the right to choose the end of their accounting year. If you choose wisely and pick the end date earlier in the tax year, you’ll end up having more time to pay, meaning you’ll avoid struggling to pay your taxes on time.
- Annual losses – If you end up making a loss rather than a profit in one year, you can offset the loss by carrying it forward and deducting it from any future profits. This way, you’ll reduce your taxable income.
- Payments on account – To spread the cost of the upcoming year’s tax, self-employed make tax payments twice a year – in January and in July. These payments are known as payments on account, and they’re calculated based on your previous year’s tax bill. Self-employed people’s income tends to fluctuate from year to year, thus, if you think that you’ll have a lower income for the next tax year, you can apply to reduce your account payment by logging into your HMRC account or sending form SA303 to your tax office.
How to cut taxes on your investments?
- Dividend allowance – If you own a share in a limited company, you can receive dividend payments in proportion to the number of shares you own. Dividends are subject to an income tax, however, there is a tax-free dividends allowance that allows you to earn a certain amount from dividend income without having to pay a tax. For 2022-23 the tax-free dividend allowance is £2.000, meaning you’ll only pay tax if your dividend payments are above the threshold.
- Capital gains tax allowance – If you make a profit after selling a certain investment, you’ll need to pay 18 % capital tax gain (CTG) if you’re a basic rate taxpayer or 28% if you’re a higher rate taxpayer. However, you can take advantage of your capital gains tax allowance and earn up to £12.300, which is the current allowance threshold, tax-free. If you own assets jointly with your spouse or civil partner, you can claim a double allowance of £24.600. If you don’t use the allowance, you won’t be able to carry it over to future tax years so it will be lost forever.
- CGT on ISA shares – It’s important to know that if you sell stocks or shares held in a tax wrapper such as ISA or pension, you won’t have to pay CTG. For that reason, ISAs are the most popular type of savings account in the Uk, according to UK savings statistics.
- Transfer assets to a spouse – If you give or sell assets to your spouse or civil partner, you won’t be charged Capital Gains Tax. This is something worth considering if your spouse pays a lower rate taxpayer than you, as it will help you pay less tax on savings and investments.
- Junior ISAs – You can open a Junior ISA account for your child under 18 and save and invest on their behalf with no tax on earnings. There are two types of Junior ISA – a Cash Junior ISA and a Stocks and Shares Junior ISA and the savings limit for 2022-23 is £9.000.
- Switch to capital-boosting investments – One way for higher rate and additional rate taxpayers to cut their tax bills if they’re getting substantial earnings from their investments is to switch to investments that target capital growth. This way, they can benefit from the annual capital gains allowance, as well as lower tax rates.
- Invest with an Enterprise Investment Scheme – You can take advantage of the Enterprise Investment Scheme, which is designed to help small companies to raise funds by offering tax relief to individual investors. If you invest in an EIS – qualifying company you can benefit from a mix of tax reliefs, including loss relief on exit, tax-free growth and up to 30% income tax relief.
- Venture Capital Trusts – If you invest up to £200.000 in VCTs per one tax year, you can reduce your income tax bill by receiving a tax relief of up to 30%. Keep in mind that to keep the relief, you must hold the investment for at least five years.
- Buy shares through your company – If you buy shares from your employer through one of the government’s schemes, such as the ShareIncentive Plan or Company Share Option Plan, you won’t be charged income tax and National Insurance. If, however, you decide to sell those shares, you’ll need to pay capital gains tax.
How to reduce property income tax?
- Use a Rent-a-Room relief – With the Rent-a-Room scheme, you can avoid paying tax on earnings up to £7.500 per year from letting a room in your house. If you earn above the threshold, you’ll need to complete a tax return. Alternatively, you can choose not to opt into the scheme and simply record your income and expenses on the property pages of your tax return.
- Landlord’s expenses – If you’re a landlord, you can reduce your tax bill by deducting some of the expenses you incur for running and maintaining your property. You can claim the cost of expenses such as landlord insurance, water rates, letting agent fees, wages for gardeners and cleaners, service charges and many more.
- Landlord’s replacement of a domestic item – As a landlord, you can also claim tax relief on costs for replacing domestic items such as beds, washing machines, cookers and fridges. Remember that you can’t claim tax relief on the costs for items you bought for the first time, just for those that are being replaced.
- Buy-to-let mortgage tax relief – If you’ve purchased a rental property through a Buy-to-let mortgage you’ll receive a tax credit based on 20% of your mortgage interest.
- Rental property CGT reduction – If you sell a property in the Uk you’ll be charged a CGT on the profits you make unless the property was your main home. This is because you’ll be entitled to private residence relief, so you won’t need to pay tax for the time you lived on the property plus the past nine months of ownership ( even if it wasn’t your main residence during those months).
Tax savings through charity
- Make a donation – Donations to charities from individuals are tax-free, thus, if you donate, you or your charity can reclaim the basic rate of tax that you’ve paid on your donation through Gift Aid. Basic rate taxpayers can claim back 25p in tax relief for every £1 they donate. Higher or additional rate taxpayers can claim the difference between the higher rate and basic rate on their self-assessment tax return or by asking HMRC to change their tax code.
How to reduce taxes as an elderly?
- National Insurance – Once you reach the State Pension age, which is now 66 for both men and women, you can stop paying National Insurance taxes legally in the Uk unless you’re self-employed and pay Class 4 NI contributions. In this case, you’ll continue paying NI contributions till the end of the tax year in which you reach state retirement age.
- Cut inheritance tax bill with gifts – You can reduce your inheritance tax bill if you gift some of your money to your spouse, children or a charity. You’re allowed to gift up to £3.000 each year tax-free, including gifts to individuals made more than seven years before your death. If, however, you make a gift within seven years of your death, there will be an inheritance tax due.
While tax is likely to be the biggest expense you’ll ever pay, there is always something you can do to reduce your tax bills. Depending on your circumstances, you can take advantage of tax perks such as government schemes, tax reliefs and allowances that could potentially save you hundreds or thousands of pounds.
Frequently Asked Questions And Their Answers
How far back in time can I claim tax relief as a self-employed?
You’re able to claim tax relief on expenses in the last four years.
Can I claim tax relief on charity donations?
You can claim up to 20% tax relief on charitable donations through Gift Aid, however, you must be able to provide evidence for your donations.
How to avoid tax legally in the UK?
Depending on your personal circumstances, you may be able to take advantage of some tax avoidance methods in the UK, such as tax relief and government schemes that can help you avoid paying unnecessary taxes and cut the cost of your tax bill.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.