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The saying that nothing is certain but death and taxes always comes to mind towards the end of the tax year. At this point, the self-employed should have submitted their self-assessment tax returns already. Most people will have been paying Income Tax automatically all year through the PAYE scheme. As the start of the new tax year approaches in April 2019, it is a good time to think about how you can reduce your tax bill.
Check Your Tax Code
Don’t just assume that HMRC has been applying the correct tax code for your income. Keep an eye on the Personal Allowance and the tax rate bands for that year and check that you are on the correct tax code for your earnings bracket. You can contact HMRC to check if you are unsure. It is better to do this as soon as possible, because on the downside you might not have been paying enough tax. The longer it takes to correct such a mistake, the more money you will owe to HMRC! However, you might find that you have been paying too much tax and should receive a refund. You should then be on the right tax code for the following year.
Use Your Tax-Free Allowances
As well as the Personal Allowance, which is due to rise to £12,500 in 2019, there are other smaller allowances which you could be taking advantage of. If you make money from selling things online, keep the total below £1,000 for the year to avoid having to declare this to HMRC and pay tax on it. There is also a £1,000 allowance for making money from your property through services like Air BnB. This is in addition to the Rent-a-Room Scheme. It allows you to let out part of your property and earn up to £7,500 without having to pay tax. That is a total of £9,500 that you could keep tax-free. If you go over the allowances, then you will have to file a tax return with HMRC so that they can update your tax bill.
Make the Most of Marriage
Another tax allowance you might want to make use of is the Marriage Allowance. Couples in a marriage or civil partnership where one person is a basic-rate taxpayer and the other does not earn enough to pay taxes would benefit from this. The non-taxpayer can transfer up to £1,190 of their Personal Allowance to their partner. The partner who pays tax at the basic rate will then be able to keep more of their income that would have gone to tax without the boost from their partner’s allowance. This could save a couple of hundred pounds over the tax year. You can even backdate the Marriage Allowance by up to 4 years if you were eligible but did not claim at the time. This could result in a tax rebate for you.
Pay Into Your Pension
The more of your income that you pay into your pension, the less you will pay in tax. There is an annual allowance of up to £40,000 for private pension contributions before HMRC will apply taxes to your savings pot. You can also carry over unused allowances from the last 3 tax years. For most people, this is more than they earn in a year anyway, but if you do earn more than that then it is a good way to make the most of saving for your future or your children’s futures. In many cases, employers deduct pension payments from their employees’ monthly pay for them. They apply tax to the remaining pay, so if you choose to contribute more to your pension, then you will receive less taxable pay and therefore pay less tax on it. All the while you will be boosting your pension savings.
Invest in an ISA
With an Individual Savings Account, or an ISA, you can save up to £20,000 tax-free. You will not have to pay tax on the interest that your savings earn while they are in the ISA. There are four different types of ISA, and you could have one of each if you wanted to, but the allowance covers all of them, not each one individually. You can also get Junior ISAs with a savings maximum of £4,260 per tax year. The child can withdraw the money when they turn 18. Like pension contributions, this is a good way to keep your money safe for the future without having to pay any further taxes on it – as long as your savings are under the allowance.
Donate to Charity
In the UK, donations to charity are tax-free. When you donate through Gift Aid, the charity can claim 25p for every £1 that you donate, so it is like you are donating more. If you are a higher-rate taxpayer, then you can make a claim to recover the tax difference when you submit a self-assessment tax return or asking HMRC to change your tax code. This means that if you pay 40% tax on your income, then you can claim 20% back against the total Gift Aid amount from your donation. Employers may offer a Payroll Giving scheme which allows employees to donate to charity through their pay. Like pension contributions, this is deducted before the Income Tax rate is applied to the remainder. So you will be effectively donating more money to charity while actually paying less.
Salary Sacrifice Schemes
Some employers may also offer “Salary Sacrifice Schemes” to their employees. With such a scheme, you would sacrifice some of your monthly pay in return for the same value in perks such as childcare vouchers, cycle-to-work schemes, or low-emission cars. You reduce your take-home pay, but you then have those benefits without having to pay Income Tax or National Insurance contributions on their financial value. However, in recent years the government has been making some cuts and imposing limitations on salary sacrifice schemes. You should check with your employer’s HR team if you want advice on using this scheme.
Claim Business Expenses
If you are self-employed, you will have to submit a self-assessment tax return by the deadline every year. You should make sure that all the information is correct so that you do not end up paying too much or too little tax. But you should definitely take the opportunity to claim back eligible business expenses and deduct them from your taxable profit. However, you cannot claim expenses if you use the £1,000 allowance for trading. Allowable business expenses to deduct from taxable income are:
- Office costs (e.g. stationery supplies and phone bills)
- Travel costs (e.g. bus or train fares, fuel, parking)
- Clothing expenses (e.g. uniforms)
- Staff costs (e.g. salaries and subcontractors)
- Financial costs (e.g. insurance or bank fees)
- Cost of premises (e.g. heating and lighting)
- Advertising and marketing (e.g. website costs)
- Purchases for selling on (e.g. stock or raw materials)