Best ways to save tax

There are lots of ways you can reduce your tax bill and give your finances a boost.

By routinely checking your finances throughout the year you can take advantage of any new tax reliefs or make small changes to increase your income or savings.

In this article, we explain:

• How not to pay tax on your savings interest
• Ways to reduce dividend tax
• The tax benefits of a pension
• Claiming back tax relief
• Carrying forward any unused allowance
• Investing in VCTs and EISs
• Claiming back marriage tax allowance
• Business tax relief
• Reducing your inheritance tax bill
• Ways to earn money without paying tax

Related content: How to fill in a tax return

Don’t pay tax on your savings interest

Each tax year, basic-rate taxpayers get the first £1,000 of interest from a savings account or current account tax free through their personal savings allowance.

Higher-rate taxpayers have a £500 allowance, while additional-rate taxpayers get nothing.

If you reach the allowance or are an additional-rate taxpayer, you can transfer some of your personal savings into a cash ISA, where all the interest earned is tax-free.

…or on dividends

Investors receive the first £2,000 of dividend income tax-free each tax year, thanks to the dividend allowance. Anything above that is taxed as follows for the 2022/23 tax year:

• Basic-rate taxpayer – 8.75%
• Higher-rate taxpayers – 33.75%
• Additional-rate taxpayers – 39.35%

If you think you’ll exceed the allowance, transfer the shares to a stocks and shares ISA, where there is no tax to pay on dividends, or on the growth in your investment.

If you are looking for a top self-invested stocks and shares ISA, check out our independent ratings here.

EXAMPLE: You have built up £150,000 in stocks and shares, which yields 4%, which equals £6,000 in dividends a year.

Holding these inside a stocks and shares ISA, rather than outside:

• Basic-rate taxpayer saves £350 in dividend tax
• Higher-rate taxpayer saves £1,350
• Top-rate taxpayer saves £1,574

Read more about how to buy shares here.

You can use our income tax calculator to work out your payments, too.

Pay more into your pension

By paying more into your pension, you can benefit from extra tax relief on an annual contribution of up to £40,000. You can read more about the pension lifetime allowance here.

If it’s a workplace scheme, you may find that your employer will match your increase, so check.

Claiming back tax relief

Depending on the structure of the pension scheme, some savers get relief at the basic rate of 20%. Higher-rate and top-rate taxpayers, who pay 40% and 45% respectively, need to claim back the additional tax relief on their pension contributions (either 20% or 25%) via their self-assessment form. 

Check with your HR department or pension provider if you’re unsure whether you need to claim the extra relief back from HM Revenue & Customs.

Carrying forward any unused allowance

If you have not taken full advantage of your annual pension allowance in the past three years you can carry forward any unused allowance.

Someone earning £120,000 in 2021-22, paying £30,000 into their pension in each of the tax years 2018-19, 2019-20 and 2020-21, would be able to pay up to £70,000 into their pension this year.

This would be made up of £10,000 of unused allowance carried forward from each of the past three years plus the full £40,000 allowance for 2020-21.

Check out our simple guide to pensions for much more information on their benefits and how they work.

Maximise your ISAs

You can save or invest up to £20,000 in the current tax year (2022/23) in one or you can mix and match across a number of different types of ISAs.

Choose from a cash ISA, stocks & shares ISA, AIM ISA, lifetime ISA and innovative finance ISA. Just remember, don’t exceed the £20,000 limit or pay into more than one of each kind of ISA each year, for example two cash ISAs.

Invest in VCTs and EISs

Venture capital trusts (VCTs) and enterprise investment schemes (EISs) allow you to shelter money from the taxman while helping businesses that are less than seven years old.

VCTs

With VCTs you can invest up to £200,000 a year and receive tax relief of 30% on the sum. The money builds, free of income tax or capital gains tax, if you keep it invested for at least five years.

This kind of investing and tax planning is risky, so it isn’t for everyone, and you may need a large amount of money as an initial investment.

Read more about how Richard saved thousands of pounds in tax using venture capital trusts.

EISs

Alternatively, an EIS allows you to invest directly into a small and growing business, so that you hold a direct stake in the company. Find out more about how do enterprise investment schemes work here.

You can invest up to £1 million a year this way and receive tax relief of 30% if you hold the investment for three years.

There is no CGT payable on gains, but dividend income will be taxed. After two years the investment is eligible to be passed on free of inheritance tax.

Claim backdated marriage tax allowance

If you are married or in a civil partnership and not claimed marriage tax allowance for five years, you could be hundreds of pounds better off. Check if you are eligible – 2.4 million qualifying couples miss out on this tax break.

One of you needs to be a non-taxpayer while the other must be a basic-rate taxpayer. The lower-earner can transfer £1,260 of their personal tax-free allowance to the higher-earner (2022/23).

This lowers the higher earner’s tax bill for the year – putting an extra £252 in your pocket. If you backdate your claim by April 5 you are looking at five years’ worth of allowances.

It is easily done on the government website. You’ll both need your national insurance numbers and ID for the non-taxpayer.

Find out more about the tax perks for married couples and civil partners in our Financial guide to marriage

Claim all your capital allowances

If you run your own business, make sure you claim for all the equipment the government allows you to offset against your tax.

Neil, a writer, forgot to claim the entire cost of his £23,000 motorbike but got on the case a year later.

Research business tax reliefs

If your business invests in innovation, check if you qualify for a government incentive known as research and development tax relief. This rewards such firms by allowing them to deduct 130% of their qualifying costs from their yearly profit.

Alex, an eco-friendly luggage and travel accessories designer, will receive a £7,000 cheque from the taxman this year for tackling the environmental problem of single-use plastics.

Similarly, the creative industry tax relief is a group of eight tax reliefs that allow qualifying companies to increase their amount of allowable expenditure. This can reduce the amount of corporation tax the business needs to pay. 

We have more about small business tax here.

Reduce your inheritance tax bill

Rising house prices mean that increasing numbers of people have enough wealth to trigger inheritance tax (IHT) on their estate when they die.

Consider gifts to reduce your tax bill. You can give away unlimited amounts to anyone, and if you then live for seven years there will be no IHT to pay.

You can also give away up to £3,000 a year in any way you want, and make as many gifts as you want of up to £250 to different people free of IHT. 

Read about ways that you can reduce your inheritance tax bill here.

AIM ISAs

AIM ISAs hold shares in companies from the Alternative Investment Market and as you would expect with an ISA, any growth and income are tax free.

The big perk with AIM shares is that most of them are not liable for inheritance tax, providing when you die you have held them for at least two years. 

As well as using this year’s tax-free £20,000, you can transfer unlimited amounts from existing ISAs.  This means that if you want to put £20k in an AIM ISA you could do that alongside transferring, say, £100k you have in cash ISAs saved over several years.

Read how John won’t pay a penny in inheritance tax on his £100,000 AIM ISA.

Don’t forget the kids

Remember that if you have children or a spouse or civil partner who has no earnings – you can make contributions of £2,880 into a pension scheme for them. HMRC will top it up to £3,600.

See our junior SIPP independent ratings for children’s pensions.

You can save or invest for your children in a cash and/or a stocks and shares junior ISA. The products offer a tax-free allowance of of £9,000 in 2022-3.

A parent needs to open the account but anyone can pay money into it, and the money is automatically transferred to the child when they reach their 18th birthday.

Read more about the pros and cons of opening a junior ISA for your kids here.

Make a quick buck

Rent out a spare room

If you rent out a furnished room in your house, you could earn £7,500 a year tax free through the Rent a Room scheme. This is halved if you share the income with your partner or someone else.

The tax break is automatic if you earn less than £7,500 a year. If you earn more, then you need to complete a self-assessment tax return to opt into the scheme and claim your allowance.

However, opting in could affect your entitlement to some benefits and the ability to claim for expenses related to the letting.

Gardening, pet sitting, or eBay selling

If you make money selling things on eBay, renting your home via Airbnb, or pet sitting, you won’t pay tax on the first £1,000 you earn. This comes under the property and trading tax allowance.

If you have income from both property and trading – for example, you get paid for gardening and rent your drive out – you can get up to £1,000 tax relief on both.  

A full list for what counts as trading income can be found on the government website.  

There are some exceptions. You can’t use the allowance if you have any trade or property income from:

• a company that is controlled by you or someone connected to you
• a partnership if you or someone connected to you is a partner
• or if the income is from your employer or the employer of your spouse or civil partner

You don’t need to tell HMRC unless you earn more than the £1,000 or you are doing a self-assessment tax return for another reason, such as claiming maternity allowance based on your self-employment.