Nobody wants to pay more tax than is necessary. The good news is that the UK tax system offers a range of allowances, exemptions and reliefs designed to help you keep more of what you earn and grow your wealth efficiently. Here are five practical ways to reduce your tax bill.
1. Use your pension allowance
Making pension contributions remain one of the most effective ways to save for your future whilst also potentially reducing your income tax bill. When you pay into a pension, you receive tax relief on the money you contribute. The rate of relief will depend on your rate of income tax you pay. Basic-rate taxpayers get 20% relief automatically, while higher-rate (40%) and additional-rate (45%) taxpayers can claim extra relief through their tax return.
That means for every £80 you contribute, the government adds £20, and higher-rate taxpayers effectively get £100 worth of pension savings for just £60 of their own money.
There are changes coming about how most pension funds will be taxed when you die, so we would recommend you and your personal representatives understand the implications of this.
2. Take advantage of your ISA
An Individual Savings Account (ISA) lets you save or invest up to £20,000 each year. Any growth or income earned within an ISA is completely tax free, and you won't pay tax when you withdraw the money. However these may be included in your estate and subject to inheritance tax (IHT) depending on values and where the ISAs are invested. Unlike pension contributions, you can access ISA funds at any time without penalty, making them flexible as well as tax efficient.
Changes to the amount under 65's can invest in a cash ISA will come into force from April 2027. You should understand how this may impact any savings plan you may have going forward.
3. Make use of your Capital Gains Tax (CGT) exemption
If you sell certain assets such as shares or an investment property, you may face CGT on any profit. However, everyone has an ‘annual exempt’ amount - currently £3,000 - that you can realise tax free each year.
Married couples and civil partners each have their own allowance, so together you could realise £6,000 of gains tax free. Planning the timing of asset sales, or equalising assets between spouses before selling them, can help maximise these allowances.
4. Don't overlook your Personal Savings Allowance
The Personal Savings Allowance (PSA) is the amount of savings income you can earn each tax year without paying tax on it. Basic-rate taxpayers can earn up to £1,000 in savings interest tax free each year, while higher-rate taxpayers get £500. Additional-rate taxpayers don't receive this allowance.
5. Consider splitting income with your spouse
If you're married or in a civil partnership, consider how income-generating assets are distributed between you. If one partner pays tax at a higher rate than the other, transferring assets to the lower earner can reduce your overall tax bill.
This is particularly effective with assets which are subject to capital gains tax. Disposals between spouses are done on a “no gain, no loss basis”, making this a useful planning opportunity.
Remember: Tax rules and allowances change regularly, and everyone's circumstances are different. These strategies work best when tailored to your specific situation, which is why professional financial advice can help ensure you're making the most tax-efficient decisions for your circumstances. The resources within these pages can help you find a financial adviser in your local area.
Quick recap
- Use every allowance available - pensions, ISAs, and savings.
- Time asset sales and withdrawals to stay tax efficient.
- Consider how sharing income with a partner could help.
- Review your finances each year as rules and thresholds change.
- A little forward planning can make a big difference to what you keep.
This article reflects our understanding of current legislation, which may change. While we can provide information, we can’t give you advice and therefore we recommend you seek professional advice before making any financial decisions. Investments can go down as well as up, and you may not get back the amount invested. Tax treatment depends on individual circumstances and available reliefs may vary.