How to pay less tax: families

15 March 2011

With the country in the grip of austerity measures, you can be sure that most of us will see our tax bill rise in April. But, while some of us 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 family with kids

Andy and Jessica Morris have two kids, Wilson, four, and Amber, two. Jessica is a full-time mum, while Andy works for an engineering firm, earning £50,000 a year. In the 2011/12 tax year, this meant Andy recieved an income tax bill of £9,930.

This year, as a result of the changes in the personal allowance and tax brands, Andy will pay £10,010. On top of this, he's subject to a higher national insurance bill - rising from £4,259.60 to £4,381.04. This will mean the family will be £201.44 worse off. 

Andy and Jessica's solution

Mike Warburton, director at Grant Thornton, recommends they take advantage of the differences in their tax positions and arrange everything more efficiently. "Jessica isn't a taxpayer, so they should put as much of their savings as possible into her name to reduce the tax," he explains.

This would be a good move. They inherited £50,000 from Andy's grandmother earlier in the year, and although they intend to move it gradually into ISAs, it's currently sitting in a deposit account earning a paltry 2% in interest.

See the latest best cash ISA rates

In Andy's name, this would equate to an annual interest payment of £600, while in Jessica's name it would be £1,000. 

Warburton also suggests starting a pension for Jessica and also for the two children. "Even without an income you can put £3,600 a year into a stakeholder pension, and because of the tax relief, you only need to pay in £2,880," he says.

For the adults, this will spread the pensions between Andy and Jessica, potentially enabling them to use both of their income tax allowances in retirement rather than just Andy's.

For the kids, although it won't be available until they reach at least 55, compounding the tax-free growth over the years could potentially make it a valuable pension pot.

Find the best annuity rate for your circumstances

Brian Lawless, tax and trust consultant at Jelf Financial Planning, also recommends that Andy considers salary sacrifice - taking a lower salary and receiving extra pension contributions instead.

"This would save him both tax and national insurance on the salary he sacrifices. Additionally, the employer saves on NI and some, or all, of these savings could go to Andy," Lawless explains.

"But of course he needs to weigh up whether he can afford to give up the salary."

If he did, however, the savings are powerful. In the past Andy has received a bonus of £10,000 when the firm won a large contract. Taken as income this would be worth £5,800 after tax and NI. "By diverting this to his pension, and providing his employer passes on its NI saving, it would be worth £11,380," Lawless adds.

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. Nine out of 10 families with children are entitled to tax credits and any pensioner receiving less than £137.35 a week (£209.70 for couples) can get pension credit.

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

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