It may often seem like we’re trapped in a battle of wits to keep our earnings safe from the clutches of the taxman, but there are plenty of measures we can take to maximise our tax efficiency. If you’re looking to gain an insight into how to cut your tax bill, read on.
Yes, death and taxes remain the two certainties in life, but that doesn’t mean we can’t gain more control over the amount of our earnings that are liable for taxation.
As the April 5th tax deadline fast approaches, many UK residents are seeking ways to boost their tax efficiency.
There are plenty of tax efficient schemes and savings strategies that can help to maintain the wealth of individuals across all earnings brackets, helping more of us to reach our financial goals even at a time when the cost of living is throwing up more challenges.
With this in mind, let’s explore 10 essential tips to cut your tax bill effectively and enjoy a greater level of financial comfort away from the spectre of the taxman:
1. Check Your Tax Code
Before we look at more complex approaches to cut your tax bill, it’s worth checking your tax code to see whether you’re in line for a rebate of any kind.
As much as 31% of those who check their tax code discover that they’ve been on the wrong one at some point in their lives, with three-quarters discovering that they’ve been overpaying by an average of £689.
Running a quick check on your tax code is the easiest way to cut a tax bill that you’re being unfairly overcharged on.
2. Maximise Your ISA Allowances
Opening an Individual Savings Account (ISA) is one of the most tax efficient ways to build your savings in the United Kingdom. Because you’re handed a £20,000 tax-free allowance each tax year, you won’t be liable to pay any tax on the profits your savings in a Cash ISA or investments in a Stocks and Shares ISA make. These benefits also extend to dividends paid into your ISA, meaning you can compound your savings to reinvest.
When it comes to cutting your tax bill, knowing your tax deadlines is important. You’re allowed to save £20,000 each tax year, which runs from April 6th and April 5th annually. This means that you could theoretically save £40,000 in two days either side of this deadline, and it makes planning your tax efficient savings essential.
3. Use Pensions Strategically
Pensions are another example of an excellent strategy to lower your tax bill through efficient savings.
Your pension contributions are liable for tax relief at your highest rate. With basic rate taxpayers gaining 20% tax relief, meaning that a £1,000 contribution, in effect, costs just £800, the 40% relief for higher rate taxpayers and 45% for additional rate taxpayers can really make an impact in building your savings away from the clutches of the taxman.
However, it’s important to note that any savings you make into your pension will be inaccessible until you reach 55 years of age (this threshold is set to rise to 57 in 2028).
4. Unite Tax Allowances With Your Spouse
Married couples or civil partners are able to maximise their tax efficiency by using the tax allowances of their spouse. For example, if you’ve maxed out your £20,000 annual ISA allowance, you can use their £20,000 if they have their allowance available.
The Marriage Allowance allows a person to transfer a portion of their allowance to their partner, which can help to lower their spouse’s tax liability.
5. Sacrifice Your Salary
Salary sacrifice schemes are an efficient means of tax planning which entitles you to switch to tax-free alternatives rather than taking a cash bonus or your full salary.
Salary sacrifice can be an effective means of reducing taxable income below £100,000 or £150,000, and reduce your effective rate of tax in the process, closely aligning with income transfers.
6. Open a JISA for Your Children
Another way to protect your wealth from taxation is to invest in your children or grandchildren’s future. The great thing about Junior ISAs (or JISAs for short) is that anyone can contribute to the savings account, and the annual tax-free allowance of £9,000 means that your money could be far more efficient than in the hands of the taxman.
However, it’s important to note that JISAs won’t be accessible until the account holder turns 18, so may not align with your financial goals.
7. Claim on Charitable Donations
Another option if you’re a higher-rate taxpayer and have gift-aided charitable donations throughout the tax year is that you can claim back the rate of tax you’ve paid.
For instance, if you’ve donated £200 to a charity, the total value of your donation was £250 and you can claim back £50 if you pay tax at 40%. You can also claim rebates on National Trust memberships (which would be worth £27.75 for a £111 per year family plan) as long as it was gift aided.
8. Claim Available Allowances
It’s also possible to take advantage of available tax allowances to reduce your taxable income. For instance, the Personal Tax Allowance and Dividend Allowance can be useful ways to keep your tax bill lower.
Personal Tax Allowance can help higher-rate taxpayers earn up to £500 in interest without the need for paying income tax from savings accounts, bonds, and other interest-generating assets. This helps to lower the amount of tax paid on savings interest.
Dividend Allowances for the tax year can also help you to receive £500 in dividend income without having to pay tax on your earnings. If you own dividend stocks, this can be a particularly useful allowance.
9. Make Your State Pension Efficient
By paying voluntary National Insurance contributions for the past six years to fill gaps in your National Insurance record, you can boost your qualifying years used to calculate your State Pension entitlement.
Although this measure won’t always increase your entitlement, you could top up your State Pension payments to help boost your tax efficiency for the financial year either way.
10. Investment Reliefs
If you’re a high earner, it’s possible to contribute up to £200,000 per year into a venture capital trust (VCT). This helps you to access 30% tax relief on your investment, turning a hypothetical £70,000 investment into one worth £100,000. This strategy can also help you to qualify for tax-free dividends.
Another similar strategy is the Enterprise Investment Scheme (EIS), which offers relief of 30% also on the value of the investment that’s claimable. If you have a higher risk appetite, using your wealth to invest in early-stage startups can be a significant opportunity to grow your wealth away from the prying eyes of the taxman.
Keep Planning
Although it’s easy to lose track of time, it’s worth considering your tax efficiency strategies moving into the 2025/2026 tax year.
Identifying how to protect your wealth from the taxman can make all the difference at a time when the cost of living continues to creep higher. Choosing a strategy that’s well aligned with your financial goals and risk appetite can be crucial in paving the way for effective wealth management in the future.
