How to Pay Less Tax: Top 5 Ways to Reduce Your Bill

Nobody wants to pay tax; we’d all like to pay as little as possible. Whilst it is our job, as advisors, to ensure our clients are fully compliant and pay only what they need to in tax there are some perfectly legal and legitimate ways you can reduce your tax bill.

Pay more into your pension

If you pay more into your pension, subject to statutory limitations, you will pay less on your tax bill. For example, if you are earning £40,000 a year and pay an extra £1,000 a year into your pension then, effectively, only £39,000 of your £40,000 salary is ‘taxable pay’.

The result is that you will pay £200 a year less. Whilst it is our job, as advisors, to ensure our clients are fully compliant and pay only what they need to in tax, effective tax planning can help you reduce your tax bill.

The benefits are greater for someone paying a higher rate of tax. Someone who earns £50,000 a year, and pays £1,000 into their pension would pay £400 a year less. This means that a £1,000 pension contribution has cost just £600.

An additional rate payer at 45% could see an investment into a pension scheme of £1,000 cost only £550!

Claim Expenses

To maximise your tax savings, it’s crucial to understand what qualifies as a deductible expense. Deductible expenses must be incurred wholly and exclusively for the purposes of running your business or rental property. Common deductible expenses include:

• Vehicle Costs: If you use a car, van, or other vehicle for business purposes, you can claim expenses such as fuel, maintenance, repairs, insurance, and depreciation. It’s important to keep detailed records of your business mileage and vehicle-related expenses to substantiate your claims.
• Office Supplies and Equipment: This includes costs for computers, printers, office furniture, stationery, and software that are necessary for your business operations. Even if you work from home, you can claim a portion of these expenses based on the space and time used for business activities.
• Utilities and Rent: If you rent an office or workspace, the rent is fully deductible. Additionally, if you work from home, you can claim a portion of your household expenses, such as electricity, heating, and internet, based on the proportion of your home used for business.
• Professional Fees: Fees paid to accountants, lawyers, and other professionals for business-related services are deductible. This includes the cost of tax preparation and advisory services, which can further help you identify additional tax-saving opportunities.
• Marketing and Advertising: Expenses related to promoting your business, such as website development, online advertising, printed marketing materials, and event sponsorships, are deductible. Investing in marketing can not only reduce your tax bill but also drive business growth.
• Travel and Subsistence: Business-related travel expenses, including transportation, accommodation, and meals, can be claimed. However, personal travel or non-business-related expenses cannot be deducted, so it’s essential to separate these costs.
• Insurance: Premiums for business-related insurance policies, such as public liability, professional indemnity, and landlord insurance, are deductible. Ensuring adequate coverage protects your business and reduces your taxable income.
• Repairs and Maintenance: Costs for repairing and maintaining business equipment, vehicles, or rental properties are deductible. This includes routine maintenance and minor repairs necessary to keep your assets in working order.

Accurate and detailed record-keeping is essential to substantiate your expense claims. Keep receipts, invoices, and bank statements organised and ensure they clearly indicate the business purpose of each expense. Using accounting software can simplify this process and help you track expenses throughout the year.

Trust a spouse

For married couples and civil partners, one effective strategy to reduce your tax liability is by moving savings and investments into the name of the partner who pays the lower rate of tax. This can be a straightforward yet powerful way to optimise your tax position and ensure more of your hard-earned money stays within the household.

How Spousal Transfers Work

The concept behind spousal transfers is simple. If one partner is in a higher tax bracket than the other, transferring assets to the partner in the lower tax bracket can result in significant tax savings. For example, if one partner pays tax at the higher rate of 40%, while the other pays at the basic rate of 20%, transferring savings into the name of the basic rate taxpayer means you could save 20p on every £1 of interest earned.

Applying the Strategy to Savings and Investments

By shifting savings and investments to the spouse or civil partner with the lower tax rate, you can reduce the overall tax burden on interest and dividends. This approach can be particularly beneficial for those with substantial savings accounts, investment portfolios, or high-yield bonds.

Extending the Principle to Property

The same principle applies to property ownership. By transferring ownership or a share of a property to the spouse or civil partner with a lower tax rate, you can reduce the amount of tax payable on rental income. This is especially useful for couples who own rental properties or second homes.

Sacrifice your salary

One of the most effective strategies for reducing your tax and National Insurance bill is to consider salary sacrifice arrangements. This involves giving up a portion of your salary in exchange for non-taxable benefits, such as childcare vouchers, which can lead to significant tax savings. This approach can be a smart financial move, especially for those looking to optimise their take-home pay while enjoying valuable perks.

Understanding Salary Sacrifice

Salary sacrifice is a formal agreement between you and your employer where you agree to receive a lower salary in return for specific benefits. These benefits are often non-taxable, meaning you won’t pay Income Tax or National Insurance contributions on their value. By reducing your taxable salary, you effectively lower your tax liability, which can result in substantial savings.

Example: Childcare Vouchers

Childcare vouchers are a popular example of a salary sacrifice benefit. Under this scheme, you can receive up to £55 a week in childcare vouchers, which are exempt from tax and National Insurance contributions. For a basic rate taxpayer, this can lead to a yearly saving of £886

Exploring Other Non-Taxable Benefits

Beyond childcare vouchers, there are various other non-taxable benefits that can be part of a salary sacrifice scheme. These include:

• Pension Contributions: Increasing your pension contributions through salary sacrifice can be highly tax-efficient. The sacrificed amount is paid directly into your pension, reducing your taxable income while boosting your retirement savings.
• Cycle to Work Scheme: This scheme allows you to sacrifice part of your salary in exchange for a bicycle and related safety equipment, which you can use to commute. This benefit is tax-free and promotes a healthier lifestyle.
• Health and Wellbeing Benefits: Some employers offer salary sacrifice options for health insurance, gym memberships, or wellness programs. These benefits can improve your overall well-being while providing tax savings.

Use ISA’s

Interest from Cash ISAs is tax free. Everyone can shelter up to £15,240 in an ISA. Not having 20%, 40% or 45% of your return eaten up by tax makes using an ISA a worthwhile thing to do.

For example, a 1.6% rate is turned into 1.28% net by basic rate tax, 0.96% for a higher rate payer, or a meagre 0.88% for an additional rate payer. Over a year that tax cost £47.77 to a basic rate payer, £97.54 to a higher rate payer, and £109.73 to an additional rate payer. This won’t happen with a cash ISA paying the same rate of interest.

Understanding and implementing effective tax-saving strategies can significantly reduce your tax liability and increase your overall financial well-being. By claiming all allowable expenses, leveraging spousal transfers, considering salary sacrifice arrangements, and exploring other non-taxable benefits, you can optimise your tax position.

These methods, when combined with professional guidance, can help you make the most of available tax reliefs and allowances.

Contact our team of expert accountants today to discuss your specific circumstances and discover how we can help you implement these tax-saving techniques effectively.