How to pay less income tax

Published by Mark King on 10 March 2014.
Last updated on 01 April 2014

Tax and coins

While most of us are comfortable with our moral obligation to pay tax, there's no need for us to pay more than we should. Everyone has a personal income tax allowance of £9,440, although this is higher for people aged over 65, rising as high as £10,660.

Anyone earning over that amount is potentially liable to pay income tax. With that in mind, here's the lowdown on how to lower your income tax exposure.

Check your tax code

You should always scan your payslip to make sure you are on the right tax code. You can find what the different letters and numbers on your code mean by checking the HM Revenue & Customs website ( If you think you're on the wrong code, contact your tax office.

Similarly, if your circumstances change, you should notify HMRC as your tax code could be affected.

Get to know your tax code

Pay attention to detail

If you're self-employed, make sure you claim any tax-deductible expenses, such as any travel and accommodation costs, computers or machinery and a proportion of the costs of running a business from home, such as heating bills. If you do so, you can deduct their full cost when working out profits eligible for tax and get immediate tax relief.

There could also be opportunities to employ your children that would allow you to use up their tax-free allowances, says Mitch Young, director of tax services at Adler Shine.

Don't pay tax on savings

Make sure you use your full Isa allowance (£11,520 for stocks and shares Isas or £5,760 for cash Isas, rising to £11,880 and £5,940 respectively from 6 April 2014) as the interest or returns you get from these are free of income tax (and capital gains tax). On the savings and investment front, you should also look at junior Isas and other children's savings vehicles.

10 things you need to know about Isas

Pay into a pension

Making contributions to a personal or company pension scheme can be made from your gross pay, reducing your gross salary for income tax purposes. Contributing to a personal pension is tax advantageous, especially if you are earning £50,000 to £60,000 and receiving Child Benefit.

"Child benefit is now taxable if income is more than £50,000," explains Andrew Minsky, partner at Nyman Linden Chartered Accountants. "Paying into a pension can reduce the tax bill or help to avoid having to file a tax return altogether. If personal income is more than £100,000, you start to lose personal allowances, so pension contributions can be up to 60% funded by the taxman."

Get help from your spouse

If you have income-producing assets, such as deposit accounts, dividend-paying shares or buy-to-let property, it can make sense to move some or all of them into the name of the spouse who pays a lower rate of income tax or no income tax at all, says NFU Mutual's Sean McCann. "The added advantage of transferring income- generating assets to a spouse with a lower marginal tax rate is the tax on interest or dividends is reduced."

There is also a capital gains tax saving to be had, says Minsky: "If a couple has one higher-rate taxpayer and one basic-rate taxpayer, it is tax-efficient to place the assets under the ownership of the basic-rate taxpayer so CGT is paid at 18% rather than 28%."

Help out small businesses

If you invest up to £100,000 in a Seed Enterprise Investment Scheme (SEIS), you can get 50% immediate income tax relief against the cost of your investment, says Minsky. But the companies involved have to meet a range of criteria and shares must be held for a minimum of three years, making this complicated and probably best-suited to sophisticated high-net-worth investors.

Wealthier and higher risk investors could also explore venture capital trusts and other tax-efficient investments.

Act your age

Make sure you're receiving your age-related allowance. If you were born before 6 April 1948, you could be eligible for an increased personal income tax allowance - so don't miss out. If you were born between 6 April 1938 and 5 April 1948 your allowance rises to £10,500; if you were born before 6 April 1938 it rises to £10,660. However, this extra allowance decreases depending on your total income in any one tax year. Check for more details.

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