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Tax is a major consideration if you want to keep more of your hard-earned wealth. This is efficiently done with tax planning. Tax saving tips abound, but you only need those that apply to your unique tax situation.
This guide gives you an overview of the options. Note, however, that this does not substitute professional advice. Discuss your options with a tax expert for optimum compliance and outcomes.
Know Your Tax Implications [2024]
Knowing which tax to pay is the first step. In the 2024/25 tax year, you may pay one or more of the following:
- Income tax if you earn more than the current tax-free threshold, £12,570
- National Insurance rates depending on your employment status
- Capital gains tax if your total annual gains exceed the current limit, £3,000
- Inheritance tax if the estate is worth more than £325,000
- Corporation tax if you run a limited company
- Dividends tax if you take out more than £500
Key Point: The kind of tax you pay, employment status, income tax band, and other factors will determine your tax saving options. The goal of tax planning is to reduce any tax liability and increase your take-home money.
Leverage Personal Allowances and Reliefs
There is a starting threshold to which you do not pay tax on, except for corporation tax. Here is your quick guide to 2024/25 tax year allowances:
| Type of Allowance | Annual Tax-Free Threshold |
|---|---|
|
Income Tax Personal Allowance |
£12,570 |
|
Transferable Marriage Allowance |
Capped at £1,260 |
|
Capital Gains Tax Exempt Amount |
£3,000 |
|
Trading Income Allowance |
£1,000 |
|
Savings Interest Allowance |
£1,000 / £500 |
|
Dividends Income Allowance |
£500 |
Maximising any of the allowances above, as applicable, is one of the top considered tax saving tips UK. This is because if they are not used, they cannot be carried forward to the next year. Personal Tax Allowance is available to everyone, except when you start earning more than £125,000.
Expert Tip: If you are married and earn less than the Personal Allowance for that year, consider using the marriage allowance. You can transfer a little over 10% of your allowance, £1,260, to your higher-earning spouse and save tax as a couple. You can also split dividends if you own shares so you can stay below the tax-free threshold of dividends.
Married couples and civil partners have more tax perks altogether. Learn more about it here: How to Claim Marriage Allowance UK | For Married & Civil Partners [Latest].
Claim Allowable Business Expenses
If you are self employed, be strategic about claiming your business expenses, as they can significantly reduce your taxes overall. The UK government gives an exhaustive list of which running costs are claimable. These costs can be claimed as a tax rebate by filing tax returns.
The kinds of expenses you can claim depend on your specific circumstance. Take, for instance, if you use part of your home for business, you can claim a portion of household expenses (e.g., utilities, internet, and council tax, etc.) using either HMRC’s simplified flat rate or based on the work hours. Learn more about Tax Relief Working from Home in the UK.
Seek Advice! Up until January this year, HMRC was distributing one to many letters to landlords who may have overclaimed business expenses or made mistaken claims. This can happen to any self-employed taxpayers, as the scope and calculation can be confusing. Claiming allowable deductions with the help of tax experts ensures you do not miss out on any business expenses or claim the wrong ones.
Use Tax-Reducing Investment Strategies
Some types of investment are more tax efficient, such as the following:
- ISAs
Individual Savings Accounts (ISAs) are an effective way to invest up to £20,000 annually without paying income tax. With a Stocks and Shares ISA, any gains or dividends are tax-free. Other tax-efficient savings accounts include cash ISAs, lifetime ISAs, and innovative finance ISAs. The flexibility of ISAs allows you to withdraw funds without losing tax benefits. Discuss with a tax professional which savings account provides you with the most tax benefits.
- Pension
Contributing up to 100% of your annual salary (capped at £60,000 for the 2024/25 tax year) to a pension can significantly reduce your taxable income. Funds within pensions grow free of income and capital gains taxes. Business owners can also make tax-deductible pension contributions against corporation tax.
- EIS and SEIS
Investing in the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offers huge tax advantages to early-stage companies. EIS allows for up to 30% income tax relief, whilst SEIS offers up to 50%. Both schemes also provide capital gains tax exemptions after three years and 100% inheritance tax relief after two years.
- VCTs
Venture Capital Trusts (VCTs) invest in small, private companies and offer up to 30% income tax relief on investments up to £200,000. Dividends and capital gains from VCTs are tax-free if the investment is held for at least five years, making VCTs a tax-efficient option for those willing to take on higher investment risks.
Be Reminded! It is crucial to review and rebalance your investment portfolio, especially at the start of the tax year. Rebalancing helps maintain alignment with your risk appetite and investment goals. Consulting with an investment professional can ensure your strategy remains effective and aligned with your changing financial needs.
Learn to Navigate Assets and Capital Gains
There are many other ways to avoid or minimise capital gains tax, such as the following:
- In most cases, inter-spousal transfers of assets are CGT-exempt. If not, transfer assets to your spouse or civil partner and combine both allowances.
- Use losses from other assets to reduce your total capital gains.
- Try Bed and ISA where you sell investments to realise gains, then rebuy them within an ISA to shelter future growth from tax.
- Deduct related costs (e.g., legal fees, home improvements) from the profits to reduce the taxable amount.
These tax saving tips 2024 can help mitigate your CGT bill, but always consider seeking professional advice for complex tax situations. For more information, here are 10 things you need to know to avoid capital gains tax on property.
Plan Your Estate and Inheritance Tax
Inheritance tax is charged on estates worth more than £325,000 (for 2024/25 tax year), with up to 40% tax on the amount above this threshold. However, with the 7-year rule, gifts made more than seven years before the legator’s death are exempt from IHT. You can also give away up to £3,000 each year free of IHT.
Other IHT-reducing strategies include:
- Using trusts to control assets.
- Signing a Gift Aid declaration (best for higher-rate taxpayers; discussed more below).
- Using equity release for the legator.
Talk to an IHT specialist for tax-reducing strategies that fit your unique personal and tax circumstances.
Savvy Tips for High-Income Taxpayers
Higher-rate taxpayers lose their Personal Tax Allowance when they start earning over £125,000. Reducing tax liabilities for higher earners mainly focuses on strategic pension contributions and investment options. Here are some:
- Donating through Gift Aid. This allows charities to reclaim 25p for every £1 you donate. You can then claim the difference between the basic rate (20%) and your highest rate of tax on your donations.
- Implementing salary sacrifice schemes to effectively lower your exposure to higher tax rates whilst taking advantage of non-cash benefits like pension contributions or childcare vouchers.
- Consider ISAs, EIS, VCTs, and other tax-efficient investments.
- Maximise pension contributions within your current allowance. Take note that employer contributions also count towards this allowance.
Need to Know! The tapered annual allowance affects you if your threshold income exceeds £200,000 or your adjusted income exceeds £260,000. This reduces your annual pension allowance by £1 for every £2 of adjusted income over £260,000. You can carry the unused allowances forward to offset excess contributions. For more tax-efficient strategies, talk to a tax planning specialist.
Tips to Reduce Corporation Tax Bill
Here are some tax-reducing strategies for limited companies:
- Claim all eligible deductions and expenses.
- Use Employer Share Schemes (e.g., Enterprise Management Incentive), which can be beneficial for both employers and employees.
- Register for VAT if turnover exceeds £85,000 using the Flat Rate Scheme.
- As your business is a separate legal entity, pay yourself a salary to reduce taxable profits.
- Make early corporation tax payments and promptly file company tax returns to take advantage of HMRC’s early payment interest incentive.
- Donate to charity.
- Apply for government tax-relief schemes (e.g., R&D tax relief, patent box, etc.).
Key Strategy: The key to reducing corporation tax is consistent diligence in recording and claiming business expenses properly. Securing a bookkeeper and/or an accountant for your company, no matter the size, ensures your financial and tax affairs are properly managed.
Visit relevant article: How to Pay Corporation Tax Online for Small Businesses.
FAQs on Tax-Saving Strategies
Self-employed individuals can minimise their tax liabilities by claiming allowable business expenses like office costs, travel, and accommodation, and making contributions to a personal pension to reduce taxable income.
To avoid overpaying taxes, employees should check their PAYE tax codes, use marriage allowance, claim allowable expenses, pay into a pension, claim the tax-free childcare, and more.
Recalling the individual savings allowance above, you can save up to £1,000 if you are a basic rate taxpayer, £500 if higher rate, and £0 (nil) if additional rate.
Get Help from Tax Experts
The tax saving tips outlined here are just your quick options. You need to discuss this with a tax professional to ensure you are using the most appropriate strategies according to your unique circumstances. Legend Financial offers holistic wealth management and tax planning services, focusing on reducing your tax bill so you can keep more of your hard-earned money in the process. Talk to our experts today!
