Being smart with your money can significantly reduce the amount of tax you have to pay to HMRC.
We are charged tax on all sorts of areas of our money, from our savings to our incomes.
However, there are clever tricks that you can adopt which will lower your tax bill and in some cases mean you sidestep having to pay the tax at all.
Here are a few examples.
Tax on dividends
Dividends can mean you enjoy an income, and not just long-term asset growth, from your investments in stocks and shares.
What’s more there’s an annual allowance on the amount you can get from dividends without having to pay tax, though it has been slashed in recent years.
Back in 2022/23 the Dividend Allowance stood at £2,000, but this was halved to £1,000 in 2023/24 tax year and stands at just £500 for the current tax year.
Again, ISAs offer a smart way around this ‒ dividends received on investments held in an ISA are tax-free and don’t count towards your Dividend Allowance.
Therefore making the most of your ISA allowance really is doubly smart when it comes to keeping your tax burden low.
Tax on savings
The Personal Savings Allowance means that most of us can earn a certain amount in interest from our savings pots before the taxman gets to take a slice.
The allowance sits at £1,000 a year for Basic Rate taxpayers, falling to £500 a year for Higher Rate taxpayers and then nothing for Additional Rate taxpayers.
Earning so much interest was not easy when savings rates were at tiny levels, but a succession of Bank Base Rate hikes means that it’s now far easier to pass those thresholds and end up paying tax on your interest.
However, a simple way around this is to make the most of your annual ISA allowance.
Currently, we all get a £20,000 ISA allowance, and returns from the money kept in those accounts is entirely tax-free.
High Income Child Benefit Charge
Child Benefit is no longer a universal benefit ‒ if you earn above £60,000 you have to start paying some of it back, until your income reaches £80,000, at which point it all has to be paid back.
It’s a daft setup but there seems little impetus to change it.
Trying to keep your income below the £60,000 level is one way around this.
You can do this using salary sacrifice ‒ giving up some of your salary, and paying it into your pension instead, for example, can mean you keep all of the benefit and get the long-term perk of a larger pension pot.
This tactic works generally if you are trying to lower your Income Tax too, though obviously there is a balance to be struck here.
There’s no point paying too much into your pension, which you won’t be able to access for decades, if doing so means you are struggling to get by in the here and now.
Income Tax
Another tactic for lowering your Income Tax outgoings is signing up for the marriage allowance.
The allowance means one partner can hand some of their unused Personal Allowance ‒ the amount you can earn each year before paying Income Tax ‒ to their higher-paid partner.
There are some hoops to jump through though, beyond the requirement of being married.
The higher earner will still have to be a basic rate taxpayer, for example ‒ if they pay the higher or additional rate, they are not eligible.
For more, have a read of our guide to the marriage allowance.
Inheritance Tax
Inheritance Tax is one of the most hated taxes around, and increasing numbers of estates are paying it.
For example, figures from HMRC show that around 41,000 taxpayers incurred an Inheritance Tax liability in the last tax year, up by 24% on the 33,000 in the previous year.
That’s largely because of house price growth in recent years, pushing more and more estates past the Inheritance Tax threshold.
There are all sorts of allowances which can be utilised to help you reduce the size of your eventual estate, such as annual gift allowances and the residential nil rate band.
Check out our guide to keeping your Inheritance Tax bill low.
Council Tax
Council Tax has become ever more painful for most of us, given the big hikes implemented by councils across the country this year.
Some people qualify for a lower rate though, which is worth chasing up.
If you are the only adult living in the property you can get a 25% cut, for example, while if all residents are classed as ‘disregarded’ ‒ students, for example ‒ then you get a 50% reduction.
Those on low incomes can get a Council Tax reduction of as much as 100% of the bill, too.
Even if you don’t qualify, it’s worth establishing that you are actually paying the correct rate of Council Tax on your property.
Capital Gains Tax
Capital Gains Tax (CGT) is paid on the profits you make when selling off an asset, like stocks and shares or a second home.
Thankfully there is an annual allowance that you can take advantage of, ensuring that you enjoy at least some of those gains without handing any over to the taxman.
The annual allowance stands at £3,000, having been cut from £6,000 last year.
Again there are ways to keep your bill to a minimum, which we outline in our CGT guide.