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The UK’s tax bill soars to £828bn – 5 ways to pay less tax

With the UK tax bill climbing an extra 5% to £828bn, we share 5 lesser-known ways to cut how much tax you pay.
Woman going through her bills and taxes.jpg

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The taxman raked in an extra 5% of tax in the 12 months to March 2024, taking the total to an incredible £827.7bn.

Most of this increase was thanks to frozen tax thresholds, which means over time millions of us are being hit with bigger tax bills.

Frozen inheritance tax allowances helped push the tax take up 5% to £7.5bn. While frozen income tax and National Insurance thresholds – plus a slashing of the capital gains tax (CGT) threshold – meant we paid an extra £23.7bn.

With frozen thresholds not planned to go away anytime soon, and the fact dividend and capital gains tax allowances were slashed again from 6 April, lots of us will be thinking about how to cut our tax bills.

Here are five lesser-known options to help you save on paying more tax than you need to.

This article isn’t personal advice. Pension, ISA, and tax rules can change, and benefits depend on your circumstances. Scottish tax rates and bands are different. If you’re not sure what’s right for you, ask for financial advice. For complex tax calculations please speak to an accountant.

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Tax allowances you might not be aware of

You have the rent-a-room allowance, so you may be able to rent a furnished room of your home to a lodger, and the first £7,500 of rent each year is normally tax-free.

Then there’s the trading allowance, which means the first £1,000 of income from a hobby or a side hustle, like babysitting or trading on eBay is normally tax-free.

You may also be able to make up to £1,000 tax free from your property from things like renting out storage space or a driveway.

Others are more widely known, but worth touching on because they’re so useful.

The first £12,570 of taxable income each tax year is normally tax-free thanks to the personal allowance. There’s also the personal savings allowance that means basic-rate taxpayers can make up to £1,000 in interest from savings each tax year without paying tax, while higher-rate taxpayers can make up to £500.

On top of that, lower earners also have the starting rate for savings which covers up to the first £5,000 of interest.


You can beat the £100,000 tax and childcare traps

If you earn over £100,000, you’ll lose some of your personal allowance, and pay tax at an eye-watering effective rate of 60% on income from £100,000 to £125,140.

Pension, including Self-Invested Personal Pension (SIPP), contributions can cut the income that counts towards this (your ‘adjusted net income’).

So, for example, if your income is £101,000 and you pay £1,000 into a pension, you could get up to £400 in pension tax relief, but you also take your income to the £100,000 threshold, so your personal allowance doesn’t taper – saving you another £200 in tax.

Your personal allowance is reduced if your income is over £100,000 – by £1 for every £2 above the limit until it reaches £0 when your income is £125,140 or more.

It means that £1,000 pension contribution has effectively cost you just £400. Plus, if a parent can bring their income back under £100,000, they might keep their eligibility to tax-free childcare too.


The high-income child benefit charge might not apply

Once you or your partner earns over the threshold, you have to start paying your child benefit back.

This charge has already eased, with the threshold rising to £60,000, and the taper rate halving, so you only have to pay it all back when you or your partner earns more than £80,000.

However, if you fall foul of this punishing charge, you could consider paying into a pension, like a SIPP.

Pension contributions reduce your adjusted net income, which is what’s used to calculate the charge. It can cut the charge – or push you out of the bracket entirely.

You can normally access your pension from age 55 (57 from 2028).

If some of your income is from savings or investments, you can also consider an ISA, as income paid from savings and investments in an ISA doesn’t count towards the £80,000 threshold.


You can make gains from sharesave schemes more tax-efficient

Workplace share schemes can be incredibly valuable. However, they can also come with a capital gains tax sting, especially now the allowance is just £3,000.

Fortunately, there’s an ISA rule that helps you save capital gains tax on shares from a Save As You Earn (SAYE) scheme or Share Incentive Plan (SIP).

As long as you transfer the shares into a Stocks and Shares ISA within 90 days of the exercise of option date (for SAYE schemes) or of the shares ceasing to the subject to the plan (for SIPs), you won’t have any CGT to pay on these shares when selling them at a later date.

Any shares put into an ISA in this way will count as a subscription to your overall £20,000 annual ISA allowance.


Some investments could be exempt from inheritance tax

If you have a large and diverse portfolio, and you’re comfortable with holding some higher risk smaller and newer companies, like those listed on the Alternative Investment Market (AIM), you could consider holding them in your ISA.

If you choose qualifying investments, and hold them for at least two years, then when you pass away, there will usually be no inheritance tax to pay on them – regardless of who you leave them to. But as always, it’s vital not to let the tax tail wag the investment dog.

Not all these approaches will work for everyone though, and you need to make sure they’re right for you. Investments and any income from them rise and fall in value, so you could get back less than you invest.

However, at a time when the taxman is taking tens of millions of pounds more from our pockets, it’s worth considering your options.

Not sure what to do? – get advice

Whether you want to make the most of your personal allowances, or shelter your income from tax, we’re here to help. Our financial advisers are experts in their field, ready to help your money work harder.

A call with our advisory helpdesk can help you:

  • Discover if you’ll benefit from advice

  • Understand the costs of taking advice

  • Decide which of our advisory services is right for you

You won’t get personal advice on the call. If advice is right for you, will we book your free initial consultation with one of our specialist advisers.

Our advisers can provide you with advice and help you to understand how tax rules apply to your personal circumstances. But for complex tax calculations, we recommend speaking to a tax accountant.

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Written by
Sarah Coles
Sarah Coles
Head of Personal Finance

Sarah provides insight and analysis to the media on topics such as savings and financial planning, and co-presents HL's ‘Switch Your Money On' podcast.

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Article history
Published: 30th April 2024