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How to pay less tax UK – 11 top tips to save money

So you want to pay less tax? Join the club. While tax is essential to keep the country running, no one wants to pay more tax than they have to.

In fact, this is one of the areas that keep the rich rich. Wealthy people will usually employ a skilled accountant to ensure they don’t pay more than they should, or need to. But why should they get all the breaks? Here’s our list of top tips to ensure you pay less tax.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Pay less tax - know your onions

First thing’s first; make sure you understand how tax works. Here are the key points you need to know about income tax.

  1. If you have any source of income, including a job or pension, you have to pay Income Tax.
  2. If you work for a company, your tax is deducted at the source using a system called Pay As You Earn (PAYE).  Income earned from a pension, if you are self-employed or earn over a certain amount, you need to complete a self-assessment to pay income tax.
  3. As well as Income Tax, you will pay National Insurance (NI). If you are over the state pension age (currently 66 but rising to 68 by 2028) you won’t pay NI.
  4. Both Income Tax and National Insurance rates vary depending on how much you earn.
  5. The Income Tax and National Insurance rate you pay only applies to the amount you earn over each threshold. Having a higher salary doesn’t bump all of your income into a higher tax threshold.
  6. You won’t have to pay any income tax on the first £12,570 you earn. This is called your Personal Allowance. If you earn over £100k your personal allowance reduces by £1 per £2 earned.

Income Tax rates

The table below shows the current Income Tax bands in the UK (though they’re slightly different if you live in Scotland – see here)

UK Income Tax rates and bands
Band Taxable income Tax rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £150,000 40%
Additional rate over £150,000 45%

National Insurance rates

The table below shows the current National Insurance bands if you’re employed in the UK. You’ll pay a slightly different rate if you’re self-employed, and if you’re above the state pension age you won’t pay National Insurance at all.

National Insurance got a little more complicated in 2022. The bands vary part way through the financial year. But the good news is that you’ll end up paying less National Insurance from July, without having to do anything!

National Insurance Bands for the employed 6th April till 5th July 2022
How much you earn National Insurance rate (Class 1)
Less than £9,880 0%
£9,880 to £50,270 13.25%
above £50,270 3.25%
National Insurance Bands for the employed 6th July 2022 onwards
How much you earn National Insurance rate (Class 1)
Less than £12,570 0%
£12,570 to £50,270 13.25%
above £50,270 3.25%

Pay less tax - 11 top tips

1. Use your Pension

Your pension is one of the most powerful tax-saving tools you have in your arsenal.

You can put up to £40,000 per year into your pension. Normally, when you put money into a savings account, you put it in from your take-home salary after you’ve paid tax on it.

By comparison, if you put money into a pension, the government will give you back any money you would’ve paid in tax. For example, if you earned £60,000 and made a £10,000 bonus, you’d take home about £5,700 of your bonus. But if you put that money into your pension, you’d get the full £10,000 (though some of it is locked away in your pension).

If your company offers pension deductions by salary sacrifice, then they may give you back your National Insurance contributions too!

Want to know more about pensions? – What is a pension and how does it work? 

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2. Use a LISA - get £1,000 tax back

You can save up to £4,000 per year into a Lifetime ISA (LISA).  Plus, the money you put into a LISA will be topped up by the government by 25%! That means you could save a total of £5,000 per year.

Get your free LISA factsheet by Hargreaves Lansdown

Importantly, you can use any money saved in a LISA to buy your first home. If not, your LISA money will be locked away until you are 60 years old. At that point, you can access all the money, tax-free.

Want to know more?
Lifetime ISA (LISA) Guide – there is such a thing as free money!

3. Earn tax free income - earn £7,500 tax-free

There are a few ways to earn extra tax-free cash. These schemes are available to everyone so it’s a good idea to see if you can take advantage of them.

  • Rent a Room Scheme – The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. That means you could rent a spare room in your house for up to £625 per month tax-free!
  • Make money from a hobby – The Trading Allowance allows you to earn up to £1,000 per year from casual services like babysitting, gardening or buying and selling items.
  • Rent your drive – The Property Allowance allows you to earn income from land or property up to £1,000 per year without paying tax. This could be from renting your drive, garage or loft space. Crucially, it can’t be used in conjunction with the Rent a Room Scheme. If you have an electric car charger, your drive could be even more attractive! See how much income your drive could make – YourParkingSpace.co.uk.

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4. Marriage Allowance - get up to £252 tax back

Marriage Allowance is a tax break for those who are, you guessed it, married or in a civil partnership. This tax break lets you transfer up to £1,260 of your Personal Allowance to your husband, wife or civil partner.

To qualify, one of you must earn under £12,570 and the other must earn over £12,570 but no more than £50,270. For most people, it’s worth around £250 per year.

Don’t panic if it’s your tenth anniversary tomorrow and you’ve never claimed… If you’re entitled to the allowance but haven’t historically claimed, you can simply backdate your application. Make your application here – Apply for Marriage Allowance.

Here’s a handy calculator to see how much you could save – Marriage Allowance calculator.

5. Use your ISA allowance - no tax on profits

You can stash away up to £20,000 per year into an ISA. While you would’ve paid tax on your income before it enters your ISA, there’s none to pay when you withdraw it. This is where ISAs differ from pensions (with a pension, you pay tax when you withdraw your cash).

Stocks and Shares ISAs have been used by investors to protect their gains from future income tax. This means any gain you make can be withdrawn without being subject to capital gains tax or income tax. There are many ISA millionaires who won’t have to worry about how much tax they’re going to have to pay in their old age.

And if you want to give your kids a head start at earning tax-free income, check out a Junior ISA. You can contribute up to £9,000 per child per year and the account will convert into a normal ISA when they turn 18.

How to become a millionaire – the surprisingly easy way.

6. Earn some dividends - up to £2,000 tax-free

Even if you’ve used up your annual ISA allowance, you can still earn up to £2,000 per year from dividends without paying tax.

You can earn dividends if you own stocks or shares. Typically, for UK shares, they’re paid every six months. Most Stocks and Shares ISA providers will also give you a General Investment Account which can be used for this purpose.

Not sure how to start? – Investing for Beginners – How to bankroll your financial freedom.

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7. Capital Gains Allowance - up to £12,300 tax-free

You pay Capital Gains Tax (CGT) on the profits you make from buying and selling assets, the most typical example being investments. However, each year you can realise up to £12,300 in profit before you start paying any tax.

Example: you bought a painting for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000). Out of the £20,000 profit, you would only pay Capital Gains Tax on £7,700 (£20,000 minus £12,300 allowance).

Capital Gains Tax doesn’t apply to investments held inside an ISA, Premium Bonds or lottery winnings.

8. Savings Interest - up to £1,000 tax-free

The Personal Savings Allowance (PSA) allows you to earn up to £1,000 per year in interest tax-free. The allowance drops to £500 for higher rate tax-payers and drops to £0 if you are lucky enough to be in the additional rate band.

9. Claim Gift Aid on charity donations (higher rate taxpayers only)

The Gift Aid scheme allows charities to claim basic rate tax relief on your donation. This means charities get a little more cash.

Essentially, for every £1 you donate, the charity actually gets £1.25.

However, if you’re a higher rate taxpayer, you’ll actually have paid twice the tax amount. The good news is that this additional amount can be claimed back via a self-assessment tax return.

If you were a higher rate tax-payer and donated £1,000 to charity, you could claim £250 back in tax relief. Additionally, the charity would get £1,250, which effectively only costs you £750. Your good deed now costs a little less!

10. Unclaimed state benefits

Annual research from EntitledTo.co.uk suggests that around £15 billion in benefits remains unclaimed each year. It’s always worth checking if there are any benefits you can claim. Most benefits are tax-free so be sure to find out whether you’re entitled to any.

Benefits calculator – What are you entitled to?

11. Company Benefits

Companies large and small offer a range of schemes that can help reduce the amount of tax you pay. It can be simple things such as free or discounted food. Or even parking, all the way through to share save schemes and company car perks.

If you don’t get any of these perks at work, it may be worth discussing them with your employer. Often, there are benefits to the business as well as the staff.

Some good examples you could bring up include:

How to pay less tax in the UK - what we think

So there it is, 11 different ways you could potentially pay less tax. And no dodgy offshore accounting practices to be seen! These are all legitimate, often unknown ways to reduce your tax bill and keep more of your hard-earned cash.

If you liked this article, check out How to get a pay rise – 10 steps to ensure success. Earning more money is your number one financial superpower. Focusing on earning more money is the fastest way to improve your finances.

If you still have questions, please come join our supportive UK Personal Finance club on Facebook where you’ll find other like-minded individuals. It’s a safe, private community where you can ask questions and learn more about making the most of your money. Best of all, it’s free! I’d love to see you there.

Here’s to your Financial Fitness

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.

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