Just finished your tax return? Here’s how to pay less tax next time

If you have to fill in a tax return, chances are that you have either done this very recently or are rushing to do it now. The deadline for online tax returns is 31st January.

You need to fill in a tax return if you have worked for yourself either as a sole trader, a business partner or a director of a limited company, even if you have another job as well. 

You may also need to fill in a tax return if you have any untaxed income from sources such as:

  • renting out a property;
  • tips or commission;
  • income from savings, investments and dividends.

 

Filling in a tax return can feel quite daunting, particularly as all the ins and outs of tax are a bit of a mystery to many of us. So it’s a relief to get it over and done with. But do you ever wonder if perhaps you are paying too much tax and whether there are legitimate ways that you could pay less?

In this article we look at five ways in which you may be able to save money on the amount of tax you pay.

 

Check that your tax code is correct

Every UK tax payer is allocated a tax code by HMRC. Your tax code indicates how much you can earn before having to pay tax. The code is a series of letters and numbers, and for most people it will be 1257L. This is based on the current UK tax free allowance of £12570. Any income up to £12570 is not taxed, but as income exceeds £12570 it is subject to tax, initially at the rate of 20%.

You will be taxed at 40% for any income over £50,270.

You should receive your PAYE coding notice for 2024-2025 in January/February. If you are self-employed this should be sent to you either electronically or by post. If you are employed your code will be on your payslip.

Mistakes do happen, so if your code is different from what you are expecting, contact HMRC on 0300 200 3300 or via online chat to check that it is correct. 

 

Get the most benefit from your personal tax allowance

If you earn less than the current personal tax allowance of £12570 and are living with a husband, wife or civil partner who earns more than you, then you could use the Marriage Allowance to transfer up to £1,260 of your personal tax allowance to them. This would reduce their tax for the year by up to £252.

To find out more details on how to do this, check out the Gov UK website.

 

Know the allowances you can claim if you are self-employed

If you are either self-employed or a private landlord, you can deduct various business expenses from your income before you pay tax on it : which reduces the overall amount of tax you have to pay.

Expenses for the self-employed include travel, home office expenses and stationery. If you use part of your home as your office, you can also claim a percentage of household bills such as energy and internet costs. You can also deduct costs related to marketing – such as your website – insurance and staff training.

Expenses for private landlords include agent fees, legal fees, maintenance and repairs, and administrative costs such as phone bills, stationery and advertising.

You may also be able to take advantage of capital allowances if you are buying more expensive items for your business such as vehicles or computers.

For more details on all the above, check out the Gov UK website.

 

Make the most of pension benefits

Most people view their pension as something that will become relevant in retirement, which may still be many years away. But it can also be viewed as a very tax-efficient form of long-term saving. 

Pension contributions – whether you are employed or self-employed – are deducted from your gross income i.e. before tax. So, whatever your circumstances, if you contribute £1,000 to your pension, your taxable income decreases by £1,000.

This means that the more money you pay into your pension, the more your taxable income is reduced and the less tax you will pay.

So if you are employed, it is worth increasing the contributions to your workplace pension and/or setting up a private pension. And if you are self-employed you can claim tax relief on pension contributions up to £40,000 per year. 

In summary, any pension contributions you make will not only boost your retirement savings but als reduce your tax bill. Win win!

 

Reduce the tax you pay on savings interest

If you have savings and earn interest on those savings, you could be taxed on that interest. There are three factors to be aware of here:

 

  • Personal Savings Allowance

If you pay tax at the basic rate of 20% you will have a Personal Savings Allowance of £1000 which means you can earn up to £1000 of interest from savings tax free.

If you pay tax at the higher rate of 40% your Personal Savings Allowance will be £500.

You can find out more about Personal Savings Allowances on the Gov UK website.

 

  • Starting rate for savings

If your income is less than £17,570 you may also earn up to £5,000 of interest on savings and not have to pay tax on it. 

You can find out more about the Starting rate for savings on the Gov UK website.

 

  • Tax free savings

There are some ways of saving money and not paying any tax on the interest you earn. Two of these are ISAs and Premium Bonds:

  • An ISA is a special savings account known as an Individual Savings Account. You are allowed to save up to £20,000 per year in an ISA without paying any tax on the interest. There are various different types of ISA including cash ISAs and stocks and shares ISAs, and no tax is payable on any interest, dividends, or capital gains earned by the ISA.

 

  • Premium Bonds can be saved in multiples of £25 up to a maximum of £50,000. Whilst there is no guaranteed interest, each month you are entered into a draw in which you can win prizes between £25 and £1 million. Anything you win is tax free. Premium Bonds are hosted by the NS&I (National Savings and Investments), a state-owned savings bank in the UK. They estimate that a typical rate of return on your investment is around 4%.

 

So if you have savings, it could be worth looking for a place for them where you pay little or no tax on any earnings from your savings.

 

We hope that the above tips help you to understand more about the tax you need to pay and those areas in which you may be able to save money on your payments. 

Check back here soon for more financial and lifestyle tips from new direct lenders Munzee Loans.