With the cost of living crisis making UK households feel the pinch from record high inflation, rising interest rates and fuel costs, many are looking for new ways to save money.
One way to do that is finding ways to save on your tax bill. There are lots of ways to reduce your tax bill legally, whether you're an employee or self-employed, a landlord, investor or pensioner.
Here are 10 top tips from consumer group Which? that can boost your take-home earnings with minimal effort.
1. Check your tax code
Consumers who pay tax via Pay As You Earn (PAYE) should check if they’re on the correct tax code, to be sure they’re not paying more tax than necessary.
Those on the incorrect code might be entitled to pay less tax in the coming months, or receive a rebate from HMRC for previous overpayments.
Someone might find themselves on the wrong tax code, or an emergency tax code if they’ve started a new job and their new employer doesn’t have a P45, if they’ve recently had a change in salary, or if they’ve started or stopped taxable state benefits. For example, basic-rate taxpayers given an emergency tax code that excludes their personal allowance could pay an extra £2,514 in the 2022-23 tax year.
Consumers should check their tax code each year, or after changing jobs, to make sure it's correct for their situation.
2. Check if you qualify for any benefits
Workers on a low income with less than £16,000 collectively in any savings and investments may be able to qualify for universal credit, which is due to replace other legacy benefits like tax credits by 2024. Payments will vary depending on people's circumstances. Those with children, for instance, could receive up to 85% of their childcare costs, up to £646 a month for one child, or £1,108 for two children.
Every year more than £15bn goes unclaimed from the Treasury from households eligible for benefits, meaning more than seven million UK households could be missing out on benefits and other help like council tax discounts.
3. Pay into a pension scheme
Employees can contribute to their employer’s pension scheme from their gross pay, before any tax is charged.
The government then tops up the pension contribution with tax relief, providing a free bonus for saving for retirement.
The effect of tax relief is that a contribution of £100 that would have been taxed at 20%, and therefore worth £80 net, is paid into your pension fund without any deduction — so it’s worth the full £100.
4. Be sure to meet the tax return deadline to avoid a £100 fine
Around 12 million people need to submit a self-assessment tax return each year.
Missing the claim deadline is a costly and easily avoided mistake. Those making an online submission have until 31 January 2023 to send in their 2021-2022 return, but for paper submissions the deadline is earlier, 31 October 2022.
Missing the deadline incurs an automatic penalty of £100, even for those who don’t owe any tax.
5. Reclaim overpaid taxes
Non-taxpayers and those whose income has unexpectedly fallen during the year might have been taxed more than they should have done, as HMRC assumes your personal allowance is equally used each month. To reclaim, fill out form R40 from HMRC, or call them.
6. Claim tax-free childcare
Under the tax-free childcare scheme, parents can claim back 25% of their childcare costs up to £500 every three months.
There are certain eligibility criteria, including having a child under 11 and earning less than £100,000.
To get started, parents need to set up an online account, which can be used to manage payments to their childcare provider. For every £8 you deposit, the government will pay in £2, up to the value of £500 every three months, or £1,000 if a child is disabled.
7. Maximise your personal savings allowance
In 2022-23, savers can earn £1,000 of interest on savings tax-free if they’re a basic-rate taxpayer. Higher-rate taxpayers have a tax-free allowance of £500.
This means they only pay tax on savings income that exceeds this threshold. This will no longer be deducted automatically by the savings provider. If tax is due, you'll need to pay it via self-assessment or have it deducted via PAYE. Keep in mind that you won't have a savings allowance as an additional rate (45%) taxpayer.
8. Use the starter rate for savings
If your income from a job or pension is below £12,570 in 2022-23, but you earn income through interest on savings, you may also qualify for the starter savings allowance. Any interest you earn up to £5,000 is tax-free.
This will be in addition to your personal savings allowance, meaning you could earn as much as £18,570 before paying tax.
9. Benefit from lesser-known allowances
Consumers can keep hold of a bigger chunk of their earnings by claiming all the tax allowances they might be entitled to.
Marriage tax allowance and the Rent-a-Room scheme can save significant sums, yet relatively few people are aware of them. For example, those renting out a room in their home can take advantage of the Rent-a-Room scheme, which means they can earn up to £7,500 tax-free.
Marriage allowance benefits couples where one partner earns less than the personal allowance, and the other is a basic-rate taxpayer.
Married couples or those in a civil partnership can transfer a 10% personal allowance from the lower-earning partner to the higher earner. In 2022-23, £1,260 can be transferred, potentially saving you up to £250.
10. Get a reduction on your council tax if you’re a low earner
Those on low incomes may be eligible for a council tax reduction of up to 100%. Each local authority has different criteria for who is eligible to claim council tax reduction and the size of the reduction depends on income, savings and whether the claimant lives alone.
Those who don’t qualify for a discount themselves, but share a property with a second adult who does (and is not their spouse or civil partner), might be able to claim a second adult rebate.