No matter whether you’re employed in a company or you’re your own boss, there is always something you can do to become more tax-efficient!
How to pay less tax in the UK as an employee or self employed?: summary table
|❓What can I do to pay less taxes?||The most straightforward way to pay less in taxes is to make sure that you are claiming all the tax relief that you are eligible to receive.|
|🤔 How can I pay less taxes if I’m unemployed?||As a self-employed worker, consider enlisting the help of a financial advisor to see what you can deduct as a business expense, so that you are paying what you owe in taxes and avoiding any penalties for incorrect filings.|
|🧾 Is pension income taxable?||Even in retirement, you will pay taxes on any income you receive that exceeds your personal allowance, even if you receive your income in the form of a pension payment, including the State pension.|
How to pay less tax
Though it goes without saying, the most straightforward way to pay less in taxes is to make sure that you are claiming all the tax relief that you are eligible to receive. For example, one of the most overlooked areas where people are eligible to receive tax relief, but yet forget to do so, are the expenses that you’ve paid during the year related to your job – whether you are self-employed or a company employee. That’s right! you don’t have to be self-employed to be able to claim tax relief on work-related expenses.
You can claim tax relief on expenses related to travel, professional practice fees, uniform maintenance, purchase of work equipment like personal protective equipment (PPE), or if you are contractually required to work partly from home. You can claim tax relief for expenses incurred in the last four years.
Reduce your income tax
As of 2021, for those who qualify, the government has allotted an annual personal allowance of £12,750 of tax-free income, from salary, bonuses, rental income and pension income. Check your tax code to make sure that you are making use of your full personal allowance, since an incorrect tax code means you will be paying the incorrect amount of taxes.
If you aren’t making use of your personal allowance, work with a financial adviser to see what you can do to make your income more tax efficient.
Employee tax benefits
Another way of making sure you are paying the right amount in taxes is to take stock of your company benefits when you file. For company benefits like using company cars, accommodation at advantageous pricing, and loans, your employer pays taxes on these benefits from your salary through the PAYE programme. How much you pay depends on the benefits you use, but your employer will work that out for you – check your payslip, or go online, to see how much tax you are paying and make sure that you update your employee benefit information regularly to avoid overpaying.
Pay less tax if you’re self-employed
If you are self-employed, figuring out how much tax to pay is more involved in the process. As a self-employed worker, it’s up to you to know how to fill out your Self-Assessment tax return, and what you can deduct as a business expense, so that you are paying what you owe in taxes and avoiding any penalties for incorrect filings. For assistance in filing your Self-Assessment, consider consulting a financial advisor.
Cut tax on your savings
You are given a tax free allowance on the interest that your savings accrues each year, depending on your other income. With the starting rate for savings, you are able to earn up to £5,000 tax-free, with the amount of tax-free allowance determined by the other income you receive. For example, the allowance is reduced when other income, such as your wages, amount to more than your personal allowance. if you qualify for personal allowance and your income is over £17,570 during the fiscal year, you aren’t eligible to receive the starting rate allowance for savings.
Depending on your income tax band, you may be eligible to receive a savings interest allowance of up to £1,000. Even higher-rate taxpayers can earn up to £500 i in interest without having to pay tax on the amount accrued. Only the highest tax bracket does not benefit from the personal savings allowance.
Cut your investments tax bill
You can cut down on the capital gains taxes you pay on your investment earnings by making the best use of your capital gains tax allowance. The allowance threshold for the current 2022/2023 tax year for capital gains is £12,300, over which point you must pay taxes on your earnings. Opening a Stocks and Shares ISA can be a good way for you to maximise the tax savings on the returns you receive from your investments. The allowance for Stocks and Shares ISA taxes is higher compared to your personal allowance, set at £20,000 for the 2022 UK tax year.
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In order to maximise your capital gains tax allowance, think strategically about when and how much of your assets you sell from your investment portfolio – capital gains are taxed according to your income, paying a more advantageous tax rate at a lower income tax bracket. So if you know that you will be moving to the next tax bracket, and you want to sell some shares, do so while you are still in the more advantageous tax bracket.
Another common approach to maximising your tax allowance on capital gains is to transfer ownership of the assets to a spouse or civil partner that does not otherwise plan to make use of their capital gains allowance before proceeding to liquidate the investment. However, temporary transfer of ownership of the asset to your spouse or partner for liquidation constitutes tax evasion, meaning that the asset and cash received from selling is legally their property in the case of separation.
Save on property income tax
If you let property, make sure that you are claiming all the deductions that you are eligible for as a landlord! You may be able to deduct some of the costs associated with managing the property, such as commuting to and from the property, safety inspections, or agency fees. Even utility expenses due during void periods (periods in which the property is unoccupied) can be claimed as a letting expense.
Tax savings for older people
Is pension income taxable? Even in retirement, you will pay taxes on any income you receive that exceeds your personal allowance, even if you receive your income in the form of a pension payment, including the State pension.
Once you reach the age in which you are eligible to start taking money out of your pension pot, 25% of the income that you receive in pension payments is tax-free, while the rest is subject to tax according to the tax bracket you fall under, though there is pension tax relief for high earners.
Charity tax savings
Just as pension contributions are incentivized through tax relief, so are charitable donations. Charitable gifts made through the Gift Aid scheme provide for tax relief to the tune of 20%, but you will be asked to provide evidence of your donations at the end of the fiscal year, so make sure that you keep all the relevant documentation. Bequeathing money or assets to charity are also exempt from inheritance tax, since once they are made, they no longer constitute part of your estate.
What are the easiest ways to pay less taxes?
You can claim tax relief on expenses paid out of pocket related to your job, such as travel, professional practice fees, uniform maintenance, purchase of work equipment like personal protective equipment (PPE), or if you are contractually required to work partly from home.
How far back in time can I claim tax relief?
You can claim tax relief for expenses incurred in the last four years.
Can I claim tax relief for payments made to charity?
You can request up to 20% tax relief on charitable donations, though you must be able to provide evidence of your donations.