How to pay less tax: the basic-rate taxpayer

Published by Sam Barrett on 08 March 2011.
Last updated on 28 January 2013

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With the country in the grip of austerity measures, most of us are expecting our tax bills to rise. But, while some of it's unavoidable, there are steps you can take to ensure you don't hand over more than you need to.

Simply refusing to pay tax isn't possible without breaking the law, but figures from professional advice website show we're wasting billions of pounds in unnecessary tax.

This includes £328 million in income tax; £552 million in capital gains tax; almost £2 billion in inheritance tax (IHT); and £3.9 billion in unclaimed child and pension credits.

The average UK taxpayer wastes an estimated £186 a year in unnecessary tax payments.

Case study: a single, basic-rate taxpayer

Sarah Hardy is 32 and works as a secretary in a local accountancy firm. Her salary is £24,000 and she's keen to start saving to get on the property ladder. The increases in the personal allowance announced in the 2011 and 2012 Budgets will make saving for that mortgage deposit a little easier.

In 2011/12, she took home £1,540.35 a month, but she'll get £1,556.86 a month from April. 

Sarah's solution

"It's worth using a cash individual savings account for any savings," says Jock Cassidy, managing director at Ashley Law.

"Interest received on cash ISAs is tax-free, and although rates aren't great at the moment, when they rise Sarah will be glad she made use of this tax-free allowance."

See the latest best cash ISA rates

In 2012/13, she can pay a maximum of £5,640 into a cash ISA. At the time of writing, the best easy access ISA is the First Trust Bank Cash ISA Account which pays 3.1% AER.

Although Sarah's priority is to buy her first home, Cassidy says it might also be worth starting a pension. This is a big winner on the tax front as she'll get tax relief at 20% on any contributions. In practice this means it will only cost Sarah £80 to invest £100.

Getting the basics right

While complex planning can save you thousands in tax, it's also worth paying attention to the basics such as your tax code and tax credits. This guide will help you get the basics right.

  • Check your tax code by looking at your pay slip or asking your tax office for a coding notice. This will detail your allowances and any deductions due to state benefits or taxable employee benefits.

If it doesn't look right, query it - any errors will affect how much you pay or potentially result in a large tax demand if you're paying too little.

Given the size of most of our tax bills, it's probably no surprise that some of us pay too much. This can happen if you change jobs and your correct tax code isn't used, or if you have more than one job. If the overpayment relates to the current tax year, contact your tax office as it'll be able to adjust your tax code.

If an overpayment relates to a previous year, write to your tax office with your P60 and details of your income. You can claim back overpaid tax for up to four years. 

  • You can also pay too much tax on your savings, as tax on interest is deducted at source. If this has happened, complete a form R40 Tax Repayment Form for each year you've paid too much. A form R85 from your building society or bank will stop future interest being taxed.
  • Another basic that can affect your overall financial position is tax credits.

A benefit-checker such as that provided by Turn2us can help you claim your entitlement (

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