Are you looking for ways to pay less tax in the UK? Probably because you are paying more than you need. Rest assured that there are lots of ways you can pay less tax on your UK income and savings. In this article, we’ll be looking at all the ways you could pay less on income, council, and self-employed tax. We’ll show you how basic checks can help you increase your take-home pay with little effort, as well as how to take advantage of tax breaks and government programs.
How To Pay Less Tax
Taxes are likely to be your single largest out-of-pocket expense. The simplest way to make your money go further is to reduce your tax burden. Making even little modifications to your tax situation will save you a lot of money, especially with the highest rate of income tax at 45 per cent.
Tax Rates
The tax you pay on your earnings from work is known as income tax. Depending on how much you earn, it can range from 0% to 45 per cent. You must also pay income tax on any dividends and savings interest you earn in the UK.
When you sell something for a profit, such as a second home or an investment, you must pay capital gains tax. It varies between 10% and 28%, depending on how much profit you produce. The tax paid by your estate when you die is known as inheritance tax. This is a 40 per cent flat rate.
How To Pay Less Income Tax UK
‘Tax relief’ means one of two things:
If you’re self-employed in the UK you may pay less income tax to account for the money you’ve spent on specified things, such as company expenditures.
Get your tax back or have it returned in a different way, such as a personal pension. Some sorts of tax relief are granted automatically, while others must be applied for. Let’s start with some of the most basic strategies to pay less income tax in the UK.
#1. Examine your tax code.
The amount of tax HMRC will deduct from your salary is determined by your tax code. It can be found on your pay stub. Make sure your tax code is correct for your situation each year or after moving jobs. In their guide to knowing your tax code, they’ll go over the most popular ones. If you’re on the incorrect tax code, you may be eligible for a tax reduction in the coming months or a refund for previous years.
#2. Make a tax credit claim
Make a tax credit claim if you hoping to pay less on income tax in the UK. Tax credits give extra money to people who look for children, disabled people, and other low-wage workers. Working tax credits and child tax credits are the two primary forms of tax credits that can be claimed. Keep in mind that if you currently receive Universal Credit, you won’t be able to claim tax credits.
#3. Contribute to a pension plan
Contributions to your employer’s pension plan (including any additional voluntary contributions) can be deducted from your gross salary before taxes are deducted. Tax relief from the government will supplement your pension, thus giving you a free bonus for saving for retirement. Contributing to a pension plan is another way you can pay less income tax in the UK. To see how much you could save, try out a pension tax relief calculator.
#4. Make use of the marital allowance
The marriage allowance is a tax benefit for spouses whose combined income is less than the personal allowance. You can transfer any unused personal allowance from the lower-earning partner to the higher-earning partner if you’re married or in a civil partnership. In 2021-22, you can transfer up to £1,260, which might save you up to £250. The higher earner must be a basic-rate taxpayer to qualify.
#5. Prepare your tax return on time.
If you’re one of the 2 million people who must file a self-assessment tax return, don’t miss the deadline – it’s a costly and readily avoidable mistake. You have until January 31 to submit your return if you are submitting it online. If you want to file on paper, you must do so by October 31. If you miss the deadline, you’ll be fined £100, even if you don’t owe any tax. Always prepare your tax return on time if you will be eligible to pay less income tax in the UK.
#6. Taxes that have been overpaid can be reclaimed.
If you are a non-taxpayer or your income declines unexpectedly during the year, you may be taxed more than you should have been since HMRC thinks your personal allowance is spent equally each month. To reclaim, fill out HMRC’s form R40 or give them a call.
How To Pay Less Council Tax
If you have a low income or get benefits, you may be eligible. Your bill could be cut in half. If you own your home, rent it, are unemployed, or working, you can apply.
What you get is determined by the following factors:
- Depending on where you live, each municipality has its own programme.
- your current situation (eg income, number of children, benefits, residency status)
- savings, pensions, and your partner’s salary are all included in your household income.
- if you live with your children
- if you share your home with other adults
Who is responsible for the cost?
If you’re 18 or older, you’ll almost always be required to pay Council Tax. A complete Council Tax bill is calculated depending on the presence of at least two persons in a household. Living together, spouses and partners are jointly liable for paying the cost.
Who is not counted?
When determining how many people live in a home, some people are not counted (‘disregarded’). If you qualify, you may be able to apply for a discount on your Council Tax bill.
If you’re one of the following, you’ll be ignored:
- Under the age of eighteen
- On several apprentice programmes
- 18 or 19 years old and enrolled in full-time classes
- A full-time college or university student
- If you are under the age of 25 and receive support from the Education and Skills Funding Agency,
- A nursing student
- A British Council-registered foreign language assistant
- Severely psychologically handicapped
- A live-in caregiver for someone under the age of 18 who is not your partner, spouse, or child
- A diplomatic mission
See If you Qualify to Pay Less Council Tax.
If you have a low income, you may be eligible for a less pay council tax. If you receive benefits or have other people living with you, this may affect your council tax reduction. Your local council will inquire about your income and circumstances in order to determine if you are eligible for Council Tax Reduction (CTR). They will then calculate your new bill and inform you of the amount of council tax you must pay.
If you live with other persons who are 18 or older, you may be responsible for paying council tax as a group. Only one of you needs to submit an application for CTR. If you’re given CTR, you won’t usually receive any money. The council will reduce the amount of council tax you must pay.
Check if you are Eligible for UK Benefits.
You must demonstrate that the United Kingdom, Ireland, the Channel Islands, or the Isle of Man is your primary residence and that you intend to stay – this is known as being ‘habitually resident’. If you’ve recently returned to the UK after living or working abroad, proving that you’re a habitual resident may be tough. If you’re from the United Kingdom, the European Economic Area (EEA), or Switzerland, you can see if you qualify for benefits. The European Economic Area (EEA) includes EU members as well as Iceland, Liechtenstein, and Norway.
If you are subject to immigration controls, you must determine if you are eligible for UK benefits and services.
Check to see whether any CTR rules apply.
The criteria that apply are usually determined by whether or not you have achieved State Pension age. GOV.UK allows you to check your State Pension age.
The ‘working age rules apply if you are under the age of the State Pension. If you’ve attained the State Pension age, you or your partner may be eligible for certain benefits.
If you’ve attained the age of State Pension eligibility and you or your partner receive:
- Universal Credit (UC)
- Jobseeker’s Allowance is dependent on income (JSA)
- ESA (Employment and Support Allowance) based on income monetary assistance
The ‘pension age regulations’ apply if you’ve reached State Pension age and aren’t receiving any of these benefits.
If you and your partner own money together. If you possess capital with someone who isn’t your partner, you’ll normally be treated as if you own half of it. For example, if you and your son have a £16,000 joint savings account, you’ll be viewed as having £8,000 in savings.
You’ll be viewed as having £16,000 in savings if you share the account with your partner.
If you live with another adult, the council may let you pay less amount of tax. This is due to the fact that some people are required to contribute to your household expenses. If the other adult is your partner, or if they are also liable to pay council tax, the council will not decrease your CTR.
How To Pay Less Tax Self Employed
Taxes can be tedious, and you may not look forward to them every year. However, filing your tax return as soon as possible might help you prevent any last-minute panic. If you rush through your form, you may miss important information.
There are numerous advantages to working for yourself. But it isn’t without its hurdles and roadblocks, particularly in the area of taxation. When you start your own business, every cent counts. As a self-employed so you’ll want to know how much self-employment tax is and how you can pay less on tax.
The secret to paying less tax and avoiding penalties is to get a handle on your money. We’ve detailed several strategies on how as self-employed you can pay less on tax. Here are six suggestions to help you save money on taxes or possibly even get some money back.
Incorporate your Company
Whether you’re just starting out as a self-employed person or have been a sole trader for a while, it’s always a good idea to check into the possibilities of incorporating your company. This implies you’ll be forming a limited liability business and becoming a director. It’s not just for businesses that are growing in size; even if you’re the only one in the company, you’ll be able to save money on taxes.
Dividends are a way for directors to get a portion of their earnings. For the first £2,000, they are completely tax-free. After that, you’ll have to pay the taxman, but the rates are significantly lower than those for self-employment income tax. This is only 7.5 per cent for basic rate taxpayers, and 32.5 per cent and 38.1 per cent for higher and additional rate taxpayers, respectively.
Self-employed people can now pay less on taxes and save a lot of money by using this strategy. Only shareholders in a corporation may not need to file a Self Assessment tax return until they get dividends in excess of £10,000.
Offset all Permitted Expenses
You’ll be able to include all of your expenses while filling out the Self-Assessment form. HMRC provides tax relief on a number of work-related expenses. Understanding which ones you can deduct is a terrific way to save money on your taxes.
Many new entrepreneurs are unfamiliar with expenses and wonder, “What can you claim for being self-employed?” The answer is that it depends on the type of business you have. Most will include travel expenses, office equipment, and financial expenses such as insurance and bank fees. Larger companies will typically have more expenses, such as salaries, office space, and marketing, allowing them to claim a broader variety of charges.
Individual expenses are subject to special rules. For example, you can claim fuel, parking, and public transportation tickets, but not for travel between your home and business.
Furthermore, you must only incur expenses for commercial objectives. If any costs were split between personal and corporate use, you would only deduct the fraction proportionate to the latter. Some expenses may appear straightforward, while others, such as those incurred when working from home, are a little more ambiguous. For example, when it comes to heating, you’ll need to figure out how much time you’ve spent working. If you’re a limited corporation, you won’t be able to use simplified expenses for specific items.
Claim on Allowances for Capital
You won’t be able to claim costs or capital allowances if you utilise the £1,000 tax-free limit for trading. These can only be deducted if you operate as a sole trader or partnership and utilise traditional accounting. Those who employ cash accounting can only claim one capital allowance: an automobile purchased for business use.
Traditional accounting allows self-employed people to offset a considerably wider range of capital allowances. Equipment, machinery, and cars are examples of assets that can be claimed if you intend to keep them for use in your firm. Capital allowances allow you to deduct both the initial cost and the depreciation of an item.
You might be able to use the Annual Investment Allowance (AIA) to offset the cost of certain things. You can claim the full amount of the AIA. Cars, assets you owned before they were utilised in the business, and items donated to you or the company cannot be claimed. If you surpass the £200,000 maximum for AIA in a 12-month period, or if the item can’t be claimed under AIA, you’ll have to use writing down allowances instead.
Donate to a Pension
Capital allowances may appear to be a solution to the question of ‘how to avoid paying tax if I’m self-employed,’ but they are strategies to pay less tax, not tax avoidance methods. Pensions are in the same boat.
These are tax-deductible, but because you’re self-employed, you’ll have to put one up yourself. The government adds an extra £25 to every £100 you put into your pension if you are a basic rate taxpayer. However, you must declare these donations on your Self Assessment tax return.
If you’re paying at the higher rate of 40%, you can claim an additional £25 on top of that. If you live in Scotland, the situation is slightly different because the higher rate is 41%, so you can collect £26.25 for every £100 you put into your pension instead.
The amount of potential tax savings is significant, but it is limited. There is a yearly allowance – only pension contributions up to the amount of £40,000 can be claimed in 2018/2019. Any money you put into your pot above this amount will not provide you with a tax benefit. It can normally be backdated if you haven’t claimed when you should have throughout the preceding three years.
Make a charitable contribution
Making a charity donation before the next year, if you have the funds, could lower your tax burden for the next tax year. Because donations can be claimed in the current or preceding tax year, this is the case.
If you paid a higher-rate tax last year and a lower rate this year, you can still claim higher-rate tax relief on your donation.
Set up an Internet Security System
An Individual Savings Account (ISA) is another option to pay less tax in the UK if you’re self-employed. There are four categories to choose from, all of which can be saved each year. The total amount of money that can be saved each year is capped at £20,000, and the Lifetime ISA has a £4,000 maximum.
Many self-employed employees choose the latter since the government adds 25% to their savings. If you take advantage of the whole £4,000 each year, you’ll end up with £5,000 before factoring in the interest you’ll earn. Lifetime ISAs, on the other hand, cannot be contributed to for the rest of one’s life; they can only be used from the age of 18 to 50.
Another appealing alternative is a stocks and shares ISA. Profits are exempt from Capital Gains Tax, which benefits those who sell assets worth more than £11,700 in a given year. Furthermore, you are not required to pay tax on bond interest or dividend income.
Conclusion
This isn’t a piece of advice for you. Because tax is such a complicated subject, you should get professional guidance if you’re not sure what’s best for your case. Tax rules are subject to change, and any benefits you receive are contingent on your circumstances. If you live in Scotland, you may be subject to varying tax rates. You can seek the services of an independent financial adviser. An adviser can help you figure out how to pay less amount of tax in the UK.
Frequently Asked Questions
Do I need to do a tax return if I earn under 10000 UK?
Although there are some exceptions, if you earn less than £10,000 or even below the personal allowance threshold and have no tax to pay, you must file a tax return.
At what salary do I pay tax?
If you are single, under the age of 65, or blind, you must file your taxes if your unearned income exceeds $1,100. Earned income exceeded $12,400. Gross income was greater than the greater of $1,100 or $12,050 + $350 on earned income.
How much can I earn without declaring it UK?
You do not have to declare your income if it is less than £1,000. You must register with HMRC and complete a Self Assessment Tax Return if your income exceeds £1,000 per year.
