Published On: Wed, Mar 6th, 2024

Tax expert names 12 ways you can cut income tax whatever today’s Budget brings | Personal Finance | Finance

Any tax cuts will be a drop in the ocean compared to the impact of Hunt’s decision to freeze income tax and National Insurance thresholds to 2028, said Sarah Coles, head of personal finance at Hargreaves Lansdown, and a tax saving expert. She said: “You need to make full use of all the tax relief and allowances available, but many people lose out because they’re not aware they exist.”

Most taxpayers know that they can earn up to £12,570 a year before paying income tax under their personal allowance (without Hunt’s freeze that figure would be closer to £15,000).

Here are 12 other ways you can cut your income tax bill.

Use the starting rate for savings. Low earners with cash in the bank can take £5,000 of savings interest free of income tax, using an overlooked tax break called the starting rate for savings.

Every £1 of income above your personal allowance shrinks this by £1, so someone earning £3,000 extra could only take £2,000 of savings interest tax free. The starter rate disappears once annual earnings hit £17,570.

Pay less tax on your savings. The personal savings allowance (PSA) applies to more people and is better known as a result. This allows basic rate taxpayers to take £1,000 worth of annual savings interest free of tax, or £500 for higher-rate taxpayers.

Until recently, this meant that nine out of 10 savers paid no tax on their interest. However, with best buy savings accounts paying five percent or more, that’s no longer the case.

If in danger of breaching your PSA, consider putting some of your savings into a tax-free cash Isa instead.

Consider the nation’s favourite investment. More than 22 million Britons hold Premium Bonds from National Savings & Investments (NS&I).

Your capital is safe because it is guaranteed by the UK government, plus you have a shot at winning one of two monthly million pound jackpots.

Many forget that Premium Bonds have income tax benefits, too, Coles said. “Whether you win £25 or £1million, prizes are completely tax-free,” Coles said.

Just remember there is no guarantee you will win a prize. Some years you may get nothing. This makes them unsuitable for those who rely on the income from their savings.

Max out your Isa allowance. Everyone can invest up to £20,000 into an Isa each year, and take all their returns free of income tax for life. You can choose between a cash Isa and stocks and share Isa, where the dividend income is free, too.

The more you pay in, the more tax-free income you can withdraw in future. 

Don’t forget the dividend allowance. Investors can also take £1,000 a year dividend income from shares held outside of a tax-free Isa. However, the dividend allowance falls to just £500 from April 6, thanks to Hunt. If that affects you, try shifting the shares into a tax-free Isa, using the Bed & Isa process.

Work that side hustle. If you have a hobby or a side hustle, like babysitting, gardening or selling on eBay, the trading allowance lets you take the first £1,000 tax free.

Take in a lodger. If you rent a furnished room in your home there is no tax on the first £7,500 under the Rent-a-Room scheme, Coles said. 

READ MORE: HMRC side-hustle tax myths busted: What new rules mean for majority of sellers

Use the property allowance. You can make another £1,000 a year from your property tax free, say, by renting out storage space or a driveway.

Get investing. Complex investment schemes designed to encourage experienced investors to put money into smaller UK businesses also offer income tax benefits, such as venture capital trusts (VCTs) and the enterprise investment scheme (EIS).

Coles said: “Income from a VCT is tax free up to a maximum of 30 percent of the amount invested, capped at £200,000 a year. VCTs are also capital gains tax free.”

Consider a purchased life annuity. While the income paid by a standard lifetime annuity is taxable, that is not the case with a purchased life annuity, bought with money that is not in your pension pot.

“Part of the income paid is deemed a return of your original investment, and is tax free,” Coles said.

Use your partner’s allowances, too. Couples who are married or in a civil partnership and share assets can double up their allowances, to generate an even larger tax-free total income, Coles said.

Claim tax relief on pension contributions. As well as boosting your pension pot, this can also reduce the amount of income that HMRC taxes you on. If employed, ask if your company offers a salary sacrifice scheme. Whatever Hunt does to ease the tax burden in today’s Budget, you can do a lot more yourself.

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