Are you paying too much tax?

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Taxes are a valuable part of society - funding our schools, roads, NHS and many other public services. However, that doesn’t mean you should be paying more taxes than you need to.

There are several allowances, credits and exemptions put in place by the government that can help you to reduce your tax burden and ensure you keep more of your hard-earned cash.

Reduce income tax

Here are some allowances and exemptions that you can use to reduce the overall amount of income tax you pay:

Pay into a pension

This can be a three-fold win! Firstly, any money you pay into your pension grows tax-free. Secondly, the contributions your employer makes receive a 20% bonus from the government through tax relief, and thirdly, if you’re in the higher rate tax band, increasing your pension contribution can drop you back down a band so you won’t be taxed at the 40% rate.

If you're a UK taxpayer then you'll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. Any contributions you make over this amount won't attract tax relief.

When you start withdrawing money from your pension after age 55, you can take 25% of it tax-free and the rest is taxed as income.

Use employee benefits

You can also take advantage of schemes that your employer offers, such as season ticket loans, Cycle-to-Work or childcare vouchers. If these are items you already need or are paying for, then purchasing them through these schemes can provide you with a discount by saving tax. If you’re just hitting a higher tax band, salary sacrifice schemes can also ensure that you drop back into the lower paying tax band.

Marriage allowance

If you earn less than the £12,500 Personal Allowance (the amount of income you earn before you have to pay income tax), then you can transfer £1,250 of your allowance to your spouse, as long as their income is between £12,501 and £50,000. By doing this, your spouse can save up to £250 in tax.

Child tax credit

If you have children and you're on a low income, you could be eligible for child tax credits. The amount you'll get depends on a range of factors such as whether your child has a disability, your income, and how many children are living with you. This is different to child benefit, which is paid at £21.05 a week for your oldest child and £13.95 a week for other children. It's worth bearing in mind that if either you or your partner earn between £50,000 and £60,000 a year then you'll have to pay a portion of your child benefit back in additional income tax. If one of you earns over £60,000, you'll have to repay it all.

Check your tax code

Moved jobs recently or been promoted? Congratulations! But before we get caught up in celebrations, take a quick peek at your tax code, as you might have been issued with the wrong one. This means you could be paying too much tax through your payslip.

People who have been put on an “emergency" tax code could be losing as much as £2,700 a year, so it's worth speaking to your payroll department if you think something is amiss.

Savings & Investing

We all love to watch our money grow, but are you doing it the tax efficient way? Basic rate taxpayers can earn up to £1,000 tax-free from savings. Once you pass this mark, consider using an Individual Savings Account (ISA). Any money you put into an ISA is tax-free, so protected from income tax or capital gains tax (a tax paid on gains from selling investments like shares and funds).

Read more here about growing your savings the tax-efficient way.

Property and side hustles

The Rent a Room Scheme lets you earn up to £7,500 per year tax-free from letting out rooms in your home. This is halved if you share the income with your partner or someone else. It can only be for renting space where you are living – not for converted separate flats or investment rental property.

However, if you do have a separate rental or perhaps you rented your house for a month while you were away on holiday, you can get up to £1,000 as a tax-free allowance for property income.

If you have a side hustle – perhaps casual babysitting or an Etsy store, there is also a £1,000 tax-free allowance for this trading income. This is the government’s way of supporting ‘micro-entrepreneurs’ – but if you exceed this you will need to fill in a Self-Assessment tax return and declare this to HMRC.

What next?

These relatively simple measures could potentially save you hundreds, if not thousands, in tax each year.

For more information on tax allowances, and to check your eligibility, the website is a good place to start.

If you're confused about tax or you have a complicated income situation, you might want to consider speaking to an adviser.

*ISA limits are regularly reviewed, any figures quoted are accurate at the time of publication.