How much tax should I pay in the UK next year? Are there ways to legally reduce my tax bill?

Taxes are unavoidable, but they don’t have to be painful. There are lots of ways to minimize or even eliminate taxes altogether through the form of tax avoidance schemes. If you want to save some cash on your taxes, check out these 25 ways to legally reduce your tax bill.

There are several ways to legally reduce your tax liability. The first step is to figure out exactly how much you owe. Then, look into deductions and exemptions that apply to you. Finally, consider the benefits of filing jointly, claiming dependents, and taking advantage of other tax breaks.

A lot of people seem to think that if a wealthy person is avoiding tax then they are cheating and that they are to blame. But to be honest, there are many methods that wealthy people use to avoid taxes which are completely legal and in fact sometimes incentivised by the government.

Your Type of Tax

It is important that before you begin figuring out how to reduce the tax you pay, that you figure out what type of tax you are paying. This will help determine whether you can actually do anything about it or not. I suspect a majority of you will be subject to income tax which is paid from active income (income you trade your time for)

Below we have split the tax types into Income Tax, Capital Gains Tax (from financial assets) and self employment tax for when you are self employed. There are also many more methods for legally avoiding tax however, we feel these in our list should be the easiest to achieve for most people.

Income Tax

1. Check your tax code

If you live in the UK, chances are you are subject to income tax. It is important to understand your tax code because this will tell you exactly how much you need to earn each year in order to be taxed at different rates.

When starting a new job (or even in some other circumstances) you may be set to an emergency tax code which indicates the employer or government doesn't have enough information to assign you the correct tax code. This often will result in you paying tax on all of your income instead of having your usual income tax allowance.

Your tax code will be dependant on your circumstances however the standard tax code for 2022/23 is 1257L. The number indicates your personal allowance. This means you make £12,570 before any taxable income. If your code does not like this then your tax code may be incorrect at which point you will have to contact HMRC to resolve the issue. Of course, your rate of tax, personal allowance and subsequently your tax code will differ depending on your circumstances.

https://www.gov.uk/tax-codes

2. Pay into a pension scheme

Pension savings allow you to get tax relief on your contributions. As you put money into your pension fund, some of the money you'd normally pay in taxes goes towards your pension instead, so you end up paying less in taxes. This can help reduce your taxes and increase your savings for the future, too.

3. Benefit from marriage allowance

Marriage allowances give couples who are married or living together tax advantages. In addition to being able to claim one spouse's earnings as their own, you can benefit from additional allowances based on the number of children you have.

4. Buy shares through your company

Some companies share plans also provide tax benefits. You can often opt-in to company share programs to have a certain percentage of your income go into the company stock before income tax comes out. This can help further reduce your income tax bill and once again provides a good way to save and invest for the future.

5. Reclaim overpaid taxes

You might have had a mistake made with your tax return and been charged extra taxes. This can also be related to having the incorrect tax code however it is important to double check your past payments to ensure your tax is correct. If you have overpaid tax for whatever reason, HMRC should be able to sort this for you and return any tax they owe you.

https://www.gov.uk/claim-tax-refund

6. Claim tax-free childcare

Childcare costs can add up quickly, but if you're eligible for childcare vouchers, you could be saving yourself thousands of pounds per year. Childcare vouchers are available to those with low incomes, and there are limits on how much you can receive.

https://www.gov.uk/tax-free-childcare

Capital Gains Tax (CGT)

1. Capital gains tax allowance

The capital gains tax allowance allows similarly to the income tax allowance allows you to profit on your assets up to a set amount each year without paying tax. Utilising this to your advantage so you are maximising your tax-free allowance is a great way to ensure you are not paying too much taxes on certain trades.

Knowing when the tax year ends may incentivise you to only sell up to a certain amount during one tax year to utilise the allowance and then selling the rest within the new tax year to ensure you are paying as little tax as possible.

2. Offset losses against gains

One way you can reduce the tax you pay is by offsetting your losses against your gains. For a rough example, if you profit £15,000 on one of your investments you would have to pay tax on whatever is above the threshold (£12,300 for 2022/23). If you have however lost £3,000 with another investment you can use that to offset your gains so that overall you have only profited £15,000 - £3,000 = £12,000 putting you within the tax allowance.

3. Stocks and Shares ISA

Another great way to reduce the tax you owe on your gains is by using a stocks and shares ISA. Stocks and shares ISA are subject to other ISA limitations e.g. you can only deposit up to £20,000 each year into your ISA. This limitation is greater than the majority of you will be able to deposit anyway so often is not an issue.

The benefit with a stocks and shares ISA is that all gains are tax-free. Freetrade offers a stocks and shares ISA for £3 per month

4. Married couple allowance

Married couples can claim a larger tax allowance than single people. The married couple's tax allowance is £24,600 which is £12,300 more than the single person's allowance.

If you are in a civil partnership or registered domestic partnership you can still claim the married couple's allowance although you must file jointly.

5. Gift Aid

Gift aid means you don't need to worry about claiming back any money from gifts given to charity. When you donate to a charity you can ask them to claim gift aid on your behalf allowing you to claim 25p for every pound

6. Private residence is exempt to CGT

Private residences such as your own home, second homes and holiday properties are generally exempt from capital gain tax. For example, if you bought a property worth £100,000 and it was now worth £150,000. You would therefore have made a gain of £50,000 on the property. However, because the property was your private residence, you would not have to pay taxes on the gains.

Self Employment Tax

1. Log your business expenses

You should keep track of all your business expenses including; travel, meals, accommodation etc. It is important to record these as they could be used to reduce the taxes you owe later on. Anything related to your self-employed business can be exempt from tax as it was technically never part of your direct income - it was to run the business. 

2. Offset taxes with losses

Similarly to how you can offset capital gains taxes with any losses you may have encountered, you can also offset self employment taxes with any losses incurred. These losses could be in the form of loss of profits, loss of capital, or even just bad luck.

3. Meet the tax return deadline

It is very easy to get caught out when it comes to meeting the tax return deadline. Make sure you meet this deadline or else you could face penalties. Of course if you face these penalties then that will be additional money you will have to fork out. Although technically not tax itself, these penalties are still often financial so ensuring you are submitting your tax return on time can protect some of your hard earned cash.

4. Tax relief on your buy-to-let mortgage

When buying a house to rent out you can use a certain amount of your mortgage payments as tax relief. This is called the 'private residential exemption' and it allows you to deduct 20% of the interest paid on your buy-to let mortgage.

5. Working from home

If you work from home there are other benefits you can take advantage of. You can claim portions of your lighting, heating, cleaning insurance, mortgage interest, council tax, water rates and general maintenance costs. However, you must be realistic with this and you can't claim back all bills. Your deductions will be based on the floor area or number of rooms you use in relation to your self-employed business.

6. Deducting your car mileage

Another way to save money on your taxes is by deducting your car mileage. In order to do this you must first register your vehicle online using the DVLA website. Once you've done this you'll receive a unique reference number which you can enter into the HMRC's Mileage Register. The next step is to log your journey details onto the Mileage Register. If you're driving to work each day or use your vehicle for work related purposes, you can deduct the miles driven.

Summary

The above list is only a small selection of ways to avoid paying tax legally. There are many more but this gives an idea of what you can do to give you a better tax advantage then what you may have had previously. Also remember that I am not a professional financial advisor, if you want to make financial decisions then consult professional tax advisers or other relevant professionals.

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FAQ

Why is tax such a big deal?

Tax is likely to be the single biggest expense you’ll ever pay. Reducing your tax bill is the easiest way to make your money go further. (frazerjames.co.uk)

What are the tax rates?

Income tax is the tax you pay on income from employment. It ranges from 0% to 45%, depending on how much you earn. You also pay income tax on any dividends you receive and any interest from savings. (frazerjames.co.uk)

When can I stop paying National Insurance?

You should stop paying national insurance after you reach State Pension age (gov.uk)