How to Reduce Your Tax Legally in the UK

1. Make sure you Tax Code is correct

Check your tax code each month – the numbers and letters will be on your payslip. If you're on the incorrect tax code, then you might be paying too much tax.

2. Pension Scheme

Contributions to your employer's pension scheme (including any additional voluntary contributions) can be made through your gross pay, meaning that it won’t be tax deducted as you won’t have been charged by tax. Your pension will be topped up with tax relief by the government, giving you a free bonus for saving for when you retire.

3. Tax return deadlines

31 October – mark it in your diary because you won’t want to miss it. To make a paper tax return it must be done before this date. You can handle your taxation online and up until the 31 January but paper tax returns require you to do them 3 months before the deadline. Otherwise you could end up with a hefty £100 fine.

4. Tax Credits

Tax credits are tax-free state benefits that provide those looking after kids, disabled workers and other workers on a low income with extra money. There are two main tax credits; child tax credits and working tax credits.

It’s important to keep in mind that if you already receive Universal credit then you won’t be able to claim tax credits as well.

5. Tax Free Savings

For the 2018-2019 tax year, you can use up to £20,000 of your tax-free ISA allowance.

This means that you can benefit from high interest rates of up to 8.7% tax-free.

There are a variety of ISAs that you can choose from; cash ISAs, stocks and shares ISAs, fixed ISAs and the recently more popular Innovative Finance ISAs (IFISA). You can even choose to spend your £20,000 on different ISAs and diversify.

6. Capital Gains

CG is the profit you gain from selling certain investments such as art, antiques and second homes. In the 2018-2019 tax year; capital gains under £11,700 are tax free. However, if you are a married couple or in a civil partnership you can claim joint allowance of up to £23,400. However, it’s important to note that if you don’t use the allowance within the tax year then it is gone forever. It isn’t possible to combine tax-free allowances together from different years.

7. Marriage Allowance

Married couples and civil partners can now transfer £1,190 of personal allowance from their low-earning partner to the higher earner. However, this is only available to those where the higher earner is a 20% taxpayer. You cannot transfer if the higher earner is a 40% taxpayer.

8. Self Employed

If you are self-employed then you can claim all your tax-deductible expenses, even including some of your cash expenditure. You can also claim the running costs of your car; however, you can’t claim the cost of buying one.

9. Rent a Room Relief

It’s an optional scheme where you can receive up to £7,500 in rent each year from a lodger, tax-free. However, this only applies if you rent out accommodation that is furnished within your own home.

If two people share a property then you can claim £3,750 each and so on dependent on how many people own the home.

10. Charitable Donations

Charity donations are tax-free. Either you or the charity can claim the tax back through ‘Gift Aid’.

In order to do this you need to claim through your self-assessment tax return or ask the HRMC to adjust your tax code.

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