After 21 successful years in business, we’ve seen it all. Tracking down ways to save tax has been our speciality since Appleby Mall was founded in 1998 – so here are 21 different methods of reducing your tax bill.
This guide is arranged into sections, so click a link below if you’d like to skip to a particular area of tax savings.
1. Use ISAs for saving money
ISAs are tax-free savings accounts. There are several different types of ISA, but the most popular options for savers are cash ISAs and stocks and shares ISAs.
Cash ISAs are savings accounts which offer tax-free interest payments. You can often access your savings at any time, although fixed-term ISAs usually offer a better return.
Stocks and shares ISAs involve investing your savings in bonds, company shares and trusts. No capital gains tax or income tax is charged on the profits you make on your investments.
The annual ISA allowance is currently £20,000, so it makes sense to keep a generous amount in these accounts. Every tax year you can put money into one of each kind of ISA.
The allowance can be used to invest in just one type of ISA (although you can only pay £4,000 into a lifetime ISA in a tax year), or you can spread the allowance across some or all of the other types.
2. Make use of your partner’s ISA too
If you’re married, or in a civil partnership, then encouraging your partner to set up an ISA is also a good idea. The £20,000 allowance is only applied to individuals, so you could save a fully tax-free £40,000 per year as a couple.
Save tax through your pension
3. Contribute to a pension
Pensions are the most tax-efficient way to save money. The government offers tax relief on pension contributions, starting at 20% for basic-rate income tax-payers. If you have some money to spare, then investing it in your pension will reap these rewards.
4. Carry forward your unused pension allowances
Any unused personal allowance on your pension from the previous three years can be carried forward to the current year. If you want to pay extra money into your pension, then it makes sense to carry forward your allowances to increase tax-efficient pension savings.
Most people have an annual pension allowance of £40,000. This could be lower in some circumstances – for example if you’ve flexibly accessed your pension pot, or if you have a high income.
Tax savings for the self-employed
5. Register as a limited company
Incorporating your business doesn’t just protect your personal assets from most liabilities, it also means you can take a tax-efficient company dividend. No National Insurance contributions are required on dividends, and the first £2,000 of your dividend will be tax-free.
For sole traders, switching to limited company status will also mean you pay corporation tax instead of income tax on your profits.
Corporation tax is currently charged at 19%, compared to the 20% basic rate and 40% higher rate of income tax, plus self employed National Insurance contributions.
6. Make full use of your expenses
While your purchases must be wholly and exclusively for business purposes, you can claim tax relief on a wide range of expenses. These expenses will be counted against your business’s profits on your annual tax return.
7. Choose your self-employed business’s year-end date wisely
Most self-employed businesses (sole traders and partnerships) use the standard tax year, running from 6th April to 5th April.
However, if you’re opening a new business, then it’s worth considering a year-end date that is earlier in the tax year. This will give more time after your year-end to pay tax on any profits.
8. Work from home
If you’re a sole trader, working from home is a good way to maximise the amount of expenses you can claim. HMRC allow self-employed business owners to claim a proportion of expenses on council tax, energy bills, maintenance and more.
9. Rent a room for more tax-free earnings
Owner-occupiers and tenants can earn up to £7,500 per year tax-free under the Rent a Room Scheme.
Save tax in the workplace
10. Join a salary sacrifice scheme
A salary sacrifice scheme involves exchanging part of your pay packet for non-cash benefits provided by your employer, such as a company car, childcare vouchers or pension contributions.
This will reduce your income tax and National Insurance bill.
Following a rule change in April 2017, some salary sacrifice benefits are now recorded on your P11D form and taxed to their equivalent value. Additional leave, some childcare, pension contributions, and ultra-low emission vehicles all remain tax-free.
11. Check your tax code
Your tax code – the short series of numbers and letters on your paycheck that corresponds to your personal allowance – may be incorrect. This could be the case if you’ve just started a new job, if you have multiple jobs, or if you have taxable benefits as an employee.
HMRC will be able to check if your tax code is correct. Your tax bill could be adjusted and you may be in line for a rebate.
12. Reclaim your overpaid taxes
HMRC calculates tax based on your monthly income. If you work in a job where your wage varies each month, or if your annual earnings are below the personal allowance of £12,500, then you may end up being overcharged. Complete an R40 form to get a refund.
Saving tax for high earners and investors
13. Invest in a Venture Capital Trust (VCT)
High earners can also invest in a Venture Capital Trust, which offers 30% income tax relief up to the £200,000 annual limit.
A VCT is an investment company that publicly trades on the London Stock Exchange.
These companies pool investors’ money to buy shares in small businesses. Any profits from selling your shares in a VCT are also free from capital gains tax.
14. Invest in the Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is a scheme set up by the Government to boost investment in growing businesses. As part of the EIS, investors receive income tax relief for up to 30% of their total investment.
You’ll receive tax relief up to the £1 million annual limit, or £2 million if you invest in knowledge-intensive companies.
The Seed Enterprise Investment Scheme (SEIS) offers even more in tax relief. Investors can receive up to 50% in income tax relief, based on the total investment.
Be strategic in how you save, sell and spend
15. Use your capital gains tax allowance wisely
Capital gains tax (CGT) is charged on the profit made from selling or transferring an asset that you own. This could be from selling shares in a company or a second property. Your main home is exempt from CGT.
The annual allowance before you start paying CGT is £12,000. If you’re selling valuable shares, then it’s worth being strategic on timing. Selling them all at once may lift you over the annual CGT allowance, so consider splitting share sales across different tax years.
There are fewer ways to save CGT when selling a second property, but you may qualify for private residence relief if it was previously your main home. Offsetting any capital losses against your gains will also reduce your tax bill.
16. Plan ahead to reduce inheritance tax
While no inheritance tax (IHT) is payable when your estate is left to your partner, it can apply if you leave a large amount of money or property to other family members. The current IHT threshold is £325,000 – or £475,000 if you pass on your home.
You could consider putting your children or grandchildren’s inheritances into a trust. If you live for at least seven years after the trust is set up, it will be counted as separate from your estate.
Trusts can be structured in many different ways, so an accountant will help you to make the best choice.
Another way to reduce your beneficiaries’ IHT bill is to give gifts. The annual exemption for gifts is currently £3,000.
Save tax on your car and home
17. Go electric to save on car tax
Vehicle excise duty – otherwise known as car tax or road tax – has risen in recent years.
In April 2019, the tax charged on most new petrol and diesel vehicles after their first year of registration increased to a flat rate of £145.
If your vehicle is worth more than £40,000, then you’ll pay £320 in tax. Switching your expensive car to a cheaper model is an easy way to save.
Electric cars are currently exempt from road tax, if they have a list price of less than £40,000.
18. Challenge your council tax band
Council tax bands in England and Scotland are based on the valuations of properties from 1991 – nearly 30 years ago. Your home may now be over-valued, meaning you pay more tax than necessary.
In 2018, more than 30% of households who challenged their council tax band were successful in getting a reduction. Less than 0.1% of challenges resulted in a higher bill, so it’s worth getting in touch with the Valuation Office Agency, if you feel you’re paying too much.
Maximise accuracy and reliability to save tax
19. Meet your filing deadlines
It may sound like obvious advice, but missing the filing deadlines for annual accounts, tax returns, and VAT returns is an easy way to throw away money. HMRC issue fines and penalties for each missed deadline.
20. Stay on top of your bookkeeping
Your records need to be accurate. HMRC will refuse incorrect expenses claims, issue penalties of up to £3,000 per year for inaccurate records, and you could pay more tax than necessary.
21. Employ an accountant
There’s nobody better at discovering ways to save tax than the experts.
An accountant will be able to find effective, legal ways to save tax. They know how the system works and will be able to analyse your business and personal affairs for possible savings. We’ve been doing that for the last 21 years.