Tips for individuals
Updated: Jan 27, 2022
30 June 2021
You can legitimately plan and manage your tax and save money to survive and thrive.
If you are running a business, have personal investments, or should you wish to opt-out of the statistics, plan your tax affairs, this article takes you back to the helpful basics.
Here are the 9 Simple and overlooked Tax saving tips for UK individuals that can help you cut your tax bill to put more pounds in your pocket.
Some simple checks could help you to take advantage of these tax reliefs and promoted by the government as legitimate tax planning, but often overlooked or not taken advantage of.
1. Pay into a pension scheme
Contributions to your employer's pension scheme can be made from your gross pay before any tax is charged. So, it is essential to make sure you do not save more into your pension plan each year than your annual allowance. You can contribute as much as you earn each year, up to £40,000, and get tax relief on your contributions – and you can 'carry forward' unused allowances from the last three years. But that amount could be less if you are a higher earner or have a modern, flexible pension plan and you have started taking money from it.
2. Marriage allowance
If you are married or in a civil partnership, you can transfer any unused personal allowance from the lower-earning partner to the higher earner. For example, up to £1,260 can be transferred in 2021-22, potentially saving you up to £250. To qualify, the higher earner must be a basic-rate taxpayer. Capital Gains tax. You will not be charged Capital Gains tax if you transfer assets to your spouse or civil partner.
3. Reclaim overpaid taxes
If you are a non-taxpayer, or your income unexpected falls during a year, you may find that you have been taxed more than you should have done, as HMRC assumes your personal allowance is equally used each month. To reclaim, make a claim form R40 must be filed with HMRC together with or without your self-assessment return.
4. Tax-free childcare scheme
Under the tax-free childcare scheme, it is possible to claim back 25% of your childcare costs, up to £500 every three months. It is necessary to meet set criteria, including having a child under 11 and earning less than £100,000. Alternatively, your employer may offer this benefit via Salary Sacrifice Childcare Scheme – when the employee agrees to exchange part of their salary in return for this benefit.
5. Employee benefit perks
If you are employed, you may have access to tax benefits such as:
Company Car. You can generally claim the running costs of a car you use for business (though not the cost of buying one). If you use the same vehicle in your private life, you can claim a proportion of the total costs.
Electric Car Charging Schemes. There is a lower Benefit in Kind charge for electric cars: 0% in the 2020-21 tax year, 1% next and 2% the year after. Vehicles with higher emissions are charged at a much higher rate.
Tax-deductible expenses. Many expenses incurred while running your business can be deducted from your profits, reducing your overall tax. This could include things like fuel, phone costs, or running costs for your home office.
6. Self Employed
As a self-employed person, you can choose when your accounting year ends. If you pick an accounting year-end date earlier in the tax year, you will have more time to pay tax on your profits. This means that as your profits increase, your tax bill will rise more slowly. Additionally, the amount you will pay will be based on the previous year's tax bill. So, if you expect to earn less in 2021-22 than in the year before, you can apply to reduce your payments on account. You will need to submit form SA303, either online or via mail, to HMRC.
7. Tax Savings Benefits
Tax-Savings threshold. In 2021-22, you can earn £1,000 of interest on savings tax-free if you are a basic-rate taxpayer. If you are a higher-rate taxpayer, your tax-free allowance is £500. You will only pay tax on savings income that exceeds this threshold.
Tax savings on ISA. ISA stands for Individual Savings Account. The main difference between an ISA and any other savings account is that it offers tax-free interest payments so that you could get more for your money. There are four types of ISA: cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs. For the 2021-22 tax year, you can deposit up to £20,000 into anyone ISA accounts. In addition, you can split your allowance across the different types of ISA. So, for example, you could save some in a cash ISA and invest some in stocks and shares ISA.
When making gifts to your children, you can avoid paying tax on the interest by paying into a junior ISA. The annual allowance for Junior ISAs is £9,000 in 2021-22.
The starter rate for savings. If your income from a job or pension is below £12,570 in 2020-21, but you earn income through interest on savings, you may also qualify for the starter savings allowance. Any interest you earn up to £5,000 is tax-free. This will be in addition to your personal savings allowance, meaning you could earn as much as £18,570 before paying tax.
8. Allowances for investments
Dividend allowance. Each year, you can earn a certain amount of income from dividends before paying tax. The dividend allowance is £2,000 for the tax year 2021-2022.
Capital gains tax allowance. Capital gains of up to £12,300 are tax-free in 2021-22. Capital gains are the profit you make from selling certain investments, including second homes, art, antiques, and shares. Married couples and civil partners who own assets jointly can claim a double allowance of £24,600.
Enterprise Investment Scheme. To encourage investments in early-stage businesses, the government offers extra tax relief on some investments. For example, if you buy shares in a qualifying company, you will be able to deduct 30% of your investment from your income tax bill for the year. As a result, the amount you can invest in any given year is £1 million - potentially saving up to £300,000 in income tax.
Venture Capital Trusts also offer 30% tax relief, but only on investments up to £200,000. To qualify for the relief, you will need to buy the shares at launch, and hold them for at least five years.
Buy shares through your company. If your employer offers free shares or the right to buy shares at preferential rates through a government-approved scheme, such as the Share Incentive Plan, Company Share Option Plan or Enterprise Management Initiative Scheme, the value of shares is exempt from income tax and National Insurance. However, you will likely need to pay capital gains tax when you eventually sell your shares.
Business asset disposal. Where a claim for investors’ relief is made, gains in respect of qualifying shares will be subject to tax at 10% subject to meeting the qualifying conditions; trading company, new ordinary shares, no employment, or director relationship and 2-year ownership.
Sale of exempt assets - cars, EIS and SEIS Shares, Foreign Currency, Gilts, Qualifying Corporate Bonds, and Wasting Chattels (asset life less than 50 years- a Racehorse).
9. Benefits on property income tax
Landlord's expenses. If you rent out a property, you can deduct a range of costs from your taxable income. These include the wages of gardeners and cleaners, letting-agency fees, ground rents and service charges, accountant's fees, and landlord insurance.
Landlord's replacement of domestic items. Landlords can claim tax relief on money spent to replace 'domestic items' in their furnished rental properties. The types of items you can claim relief on include beds, carpets, crockery or cutlery, sofas, curtains, fridges, and other white goods. But this only applies to items being replaced - not those bought for a property for the first time. You can also only claim the amount for a like-for-like replacement.
Rent-a-Room relief. The Rent-a-Room scheme allows you receive up to £7,500 in rent each year from a lodger, tax-free. This only applies if you rent out furnished accommodation in your own home, and you will need to live in the property as well. If two people who share a property take advantage of the scheme, they can only claim £3,750 each. This is reduced proportionally according to the number of people owning the home.
Tax relief on your buy-to-let mortgage. When you take out a mortgage to buy a rental property, you can claim a 20% tax credit on mortgage interest.
Reduce CGT (Capital Gains Tax) on a rental property. Landlords are generally liable for capital gains tax when they make a profit from selling a rental property. However, if the property has been your main home at some time in the past, you can claim tax relief for the last nine months of ownership.
10. Tax savings for IHT (Inheritance Tax) bill
Exempt transfers for IHT purposes such as
the annual transfer of £3,000.
small gifts of up to £250.
gifts in consideration of marriage.
normal expenditure out of income.
Lifetime gifts are not counted towards your inheritance-tax bill if you live for further seven years after making them. Known as potentially exempt transfers (PETs), a gift from your estate can reduce your bill significantly.
Business Property Relief; Up to 100% exemption from IHT
Agricultural Property Relief: Up to 100% exemption from IHT.
Fall in value relief. The amount of the relief is the difference between the value of the asset at the date of the gift and its value at the death of the donor.
Use of Deeds of variations.
Use of Trust. Protective trust or Bare Trust.
The ways to reduce your tax bill legally depend on your status, actual tax rates, personal finances, the government's annual changes to tax bands and allowances each tax year.
Therefore, with the stated above tax considerations, you could consider how to cut your tax bill. Furthermore, at LEXeFISCAL LLP, we could help you understand if any of the tips mentioned above could be applied to your circumstances.
For further information on any of the points above, please contact
Kseniya Devlekanova at firstname.lastname@example.org or
Dr Frank Clifford at email@example.com.