We all know that we have to pay taxes. It’s just one of those necessary (if not frustrating) parts of everyday life that we must accept, though of course it would be lovely if we could pay just a little less and keep a bit more of our money for ourselves.
There are actions we can take to reduce the amount of money we pay in tax, whilst still staying on the right side of the law. By taking advantage of basic tax reliefs and allowances you can help ensure that more of your income ends up in your pocket and not the taxman’s.
This guide will highlight some of the tax reliefs and allowances that are available to help you minimise your tax bill:
If you receive your income through PAYE (Pay as You Earn) then it is your responsibility to check that you are on the correct tax code. Your PAYE code determines how much of your income you pay in tax and, if you are on the wrong code, you may be paying too much.
If you have overpaid, you can claim your overpayment back by contacting the HMRC and providing them with evidence such as a P60 or P45 and an explanation as to why you think you have paid too much.
If you run your own Limited Company, then you are entitled to a tax-free dividend of £2,000.
Any dividends taken above this initial tax free £2,000 will be liable for tax at 7.5% as a basic rate taxpayer or 32.5% for a higher rate taxpayer.
Your Personal Savings Allowance allows you to earn tax free interest up to a maximum of £1,000. The PSA will be applied automatically at £1,000 for basic rate taxpayers and £500 for taxpayers on the higher rate.
If you have money available to save why not look into opening a tax-free ISA. There are many different types of ISA available on the market so you might need to shop around before you decide which one will work for you. You can hold more than one ISA and split your investment, for example a ‘Stocks and Shares ISA’ and/or a ‘Cash ISA’, although the maximum amount you are allowed to invest across all ISAs you hold is £20,000 per year.
You won’t pay any Income Tax on the interest or dividends you receive from your ISA, plus any profits from investments are free of Capital Gains Tax.
Another way of saving tax free is to pay into National Savings and Investments Premium Bonds. Premium Bonds will allow you to save in small amounts starting from a minimum investment of £25.
You are only allowed to hold one Premium Bonds account and the maximum investment you can make into the account is £50,000 in total. Another bonus to a Premium Bonds account is that you can easily withdraw your money if you need to free up some additional cash.
Premium Bonds don’t work like traditional savings accounts as they don’t pay a regular fixed return on your investment. Instead, your ‘Bonds’ are entered into a monthly prize draw where you could win anything from £25 to £1 million – or nothing at all! If you do win, your prize money is completely tax free and you can decide whether to claim your prize or re-invest.
Make regular contributions to your pension and save for your retirement whilst also reducing your tax bill. Pensions are still considered to be the most tax efficient way of saving long-term, receiving tax relief at the highest income tax rate up to £40,000.
There is tax relief available if you decide to rent out a room in your house, through the ‘Rent a Room’ scheme which allows you to enjoy tax relief on the rental income you would receive.
The first £7,500 you make from your rental each year is completely tax free. But be aware this only applies to rooms you rent out within your own home; it doesn’t apply to homes converted into separate flats.
Do you have a space on your property that you use for parking? Do you use all the space you have, or maybe you work away from home, so the space is left empty? If you have space available on your property you could rent it for parking, the first £1000 you make is tax free!
It might be worth checking that your property is in the correct Council Tax valuation band and that you are paying the correct amount.
Your valuation band is determined by what the council deems to be the ‘value’ of your home. Properties were initially assessed in the early 90s when Council Tax was introduced, and many have not been re-assessed since then.
It is possible to re-assess your home and potentially save thousands of pounds on Council Tax, but please be aware, your assessment might also highlight that you don’t pay enough.
It is possible to save into a pension for your children by investing an annual maximum of £3,600 for each child. With the basic tax relief that is available, that £3,600 will actually only cost you £2,880.
Each year you are allowed a ‘gift allowance’ of £3,000, also known as your annual exemption. This allows you to give away cash or assets with a value up to £3,000 each tax year without it being added to the value of your estate for Inheritance Tax (IHT) purposes.
What is known as the ‘7-year rule’ applies to people who gift anything from their estate that is deemed to have value. If you die within 7-years of giving the gift, then IHT (Inheritance Tax) will be charged on that gift.
However, if the gift becomes solely the recipient’s property on transfer, is not worth more than £325,000 and you live for a further 7-years then the gift will be exempt from IHT.
These are just some of the options available that you can use to maximise your finances and reduce the tax that you pay.