You don’t need to be a dodgy tax avoider to take advantage of schemes to lower your tax bill.
This week news broke that 181 footballers were being investigated by HMRC for tax avoidance. It’s not much of a surprise. Last year we learned the tax avoiding tricks of other rich and famous types such as Lewis Hamilton, each sending money to sunnier shores to reduce what they legally need to pay.
Well, for normal folk like you and I who don’t have private jets, it’s all a tad distasteful. We earn a fraction yet still pay our fair share – and through that fund services such as the NHS and schools. So tax avoidance is bad. Yes.
But tax planning is different. There are actually a few schemes the government want us to take advantage of that can reduce how much tax we do pay.
Here’s a rundown of a few things to take a look at.
Pay zero tax on your savings interest
There are a few ways you can avoid paying tax on your savings.
You don’t actually have to do anything for the first one, as in 2016 a Personal Savings Allowance (PSA) was introduced. The PSA gives every basic rate taxpayer a £1,000 a year allowance, which goes down to £500 if you are a higher rate taxpayer. This lets you earn that amount in interest before you need to start paying tax.
You can also earn tax-free interest if you keep money in an ISA. You can pay in £20,000 a year into an ISA. Though with the PSA and high-interest rates in some current accounts you might not need to bother with cash ISAs.
Or, if you’re a low earner – under £11,850 a year – you can use another tax-free savings allowance. This is worth £5,000 a year in interest.
Get tax relief on money you pay into your pension
Most contributions you make to your workplace pension will usually get tax relief depending on your tax rate. So 20% should be added automatically at source, meaning for every £100 you put in your pension, you actually only pay £80. If you’re a higher rate tax payer (at 40%), you might need to claim this back.
So the more you put into your pension (up until a certain point), the less tax you could be paying. Plus you’ll hopefully get a bigger pension pot when you retire. Nice!
Share 10% of your Personal Allowance with your partner
You don’t start paying income tax until you earn more than £11,850. This is known as the Personal Allowance. Well, if you earn this or less and are married there’s a way to give some of your tax-free allowance to your partner.
It’s called the Marriage Tax Allowance. This tax break is for couples who are either married or in a civil partnership. As long as one of you earns less than £11,850 and the other one earns less than £46,350, you can move across 10% of that personal allowance to the higher earner.
For this financial year the allowance is worth up to £238, and you can back claim for the last three tax years too.
You can apply for the Marriage Tax Allowance online. My mum and dad did this last year and had a cheque in the post within days for the previous two years money.
Rent your spare room
You can earn £7,500 a year tax-free if you rent out your spare room. You’ll have to pay tax though if you bring in more than this amount.
Keep an eye on your side hustle income
You’re also allowed to earn £1,000 tax-free from any self-employment you do in addition to your normal job. So that could be selling on eBay or at car boot sales. Or it could be wedding photography. Anything really.
But as soon as you make £1000.01, and that’s income, not profit, you have to pay tax on the full amount. So if it’s just a small extra, keep track to make sure it stays under £1,000 for the financial year.
There’s also a £1,000 property allowance if you fancy doing a bit of AirBnB or renting out your drive/shed etc. You can’t use this one as well as the Rent a room scheme though.
Give to charity before you get paid
The easiest way to donate without paying tax is through Payroll Giving. Here you say how much you want to donate, and it’s taken off your salary before tax each payday.
Ok, yes there’s Gift Aid which does a similar thing, where charities can claim the tax back from the government when you donate. But giving via the payroll scheme is actually better.
This way the charity gets full amount automatically and therefore doesn’t have to spend money on the admin to claim tax back – as it does via Gift Aid.
Plus if you’re a higher rate taxpayer the charity gets even more cash!
Find out more at the Payroll Giving website
Get a bike from work
Some employers offer benefits through “salary sacrifice”, one of which is often access to the Cycle to work scheme.
Essentially you pay for a bike straight from your pay before you get taxed (as with payroll giving). So you could end up saving 20% or 40% on the cost of the bike. Ask your HR if they offer it, but of course it’s worth shopping around just in case you can get a deal on a bike elsewhere.
Check your tax code
Ok, this one is less the government finding ways to help you pay less tax. It’s more them mucking up and costing you cash. Becky for one always seems to have issues with HMRC giving the right tax-code, causing her overpaying and then going through a laborious process of claiming it back.
For most people it should be 1185L. You can check your code on your payslip, or use this tool on the HMRC website.