All of us have wanted to find some potential income tax-saving ideas based on personal circumstances at some point in our lives.
Now that the tax year of 5 April has ended, we thought of compiling a list of 9 ways you can reduce your tax bill in 2021!
How to reduce taxable income UK
1. Pension Contributions
There are many ways to pay less tax UK. Taxed money can be used to make contributions to a personal pension. While HMRC pays the tax paid on the contribution straight into the pension scheme, the taxpayer only puts in the net amount.
This way the whole amount for the taxpayer can be invested tax free as the taxpayer contributes £80 while the HMRC contributes £20. Also, the investment can grow free from income tax and capital gains tax once it is inside the pension. Usually, tax relief can be availed by a UK resident under 75 who contributes around £40,000 from their earnings provided they are not already receiving a pension.
2. Pension Contributions to Partner’s Account
Tax efficiency can also be achieved by making contributions to a partner’s pension scheme – provided the taxpayer’s partner is not earning.
Generally, a contribution of up to £3,600 a year can be made into a pension provided an individual is
- a UK resident
- under 75
- not earning
- not receiving a pension
In such a case, while the individual will contribute around £2,880, the HMRC will contribute the remaining £720.
3. Utilizing Unused Pension Allowance
Utilizing unused pension allowance is one of the best ways to reduce income tax UK. If the total pension contributions have not reached £40,000 in the tax year and the taxpayer still has the means, they can do two things:
- contribute up to that amount this tax year
- use the excess amount available from the previous three tax years on a ‘first-in, first-out’ basis Charity Gifts
4. Charity Gifts
Charity gifts are free from income tax provided the donor has signed a gift aid declaration. Therefore, the charity will receive £100 if you gift £80 to a charity out of taxed money as HMRC will pay the other 20%. It may also be important to note that tax bands are extended for higher rate and additional rate taxpayers. This means that they can obtain similar reliefs at their highest rates.
5. Transferring Investments to your Partner
If interest on funds is being generated and one of the couples does not have total earnings from trading, employment, or property to take them over £17,570 in 2021-22, the first £6,000 of the interest received will be tax free.
Usually, basic rate taxpayers should earn at least £1,000 interest and higher rate taxpayers £500 to take advantage of the personal savings allowance even if they have non-savings earnings above this amount. Ideally, each partner should hold enough capital to generate dividends of £2,000 provided the investment income produces dividends i.e. the annual dividend allowance.
6. Transferring Personal Allowance to your Partner
Around 10% of one of the couple’s personal allowances can be transferred to the other for a basic tax rate paying the couple under the marriage allowance.
This can save up to £252 tax annually and can be conveniently done online through HMRC.
7. Utilizing ISA Allowances
To allow your income to grow tax free, you can invest in ISA investments.
Also, please note that for FY21-22, a capital of £20,000 can be invested whether the choice is between shares, stocks, or cash ISA.
8. Micro-Entrepreneurs’ Allowance
You can earn up to £1,000 from trading such as selling items online without paying any tax.
While these allowances took effect a long time ago; however, they largely remain unknown and underutilized. In case your gross property income goes above £1,000, you can either claim your actual expenses in an ordinary manner or set the £1,000 tax free allowance against your income.
9. Venture Capital Trusts
Around £200,000 per year can be contributed to a Venture Capital Trust. Through this, you can receive tax relief of 30% on the invested money. For instance, if you invest £70, the Government will put another £30 on your behalf. And any dividends received will be free of tax, while there will be no capital gains tax to pay on any profits – provided you hold the investment for five years. However, please note that Venture Capital Trusts are high risk investments and may not be suitable for everyone.
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The process of income tax planning helps you minimize the amount of taxes you owe and maximize the amount of tax refund you receive. There are various strategies you can use to reduce your income tax burden, and it is essential to familiarise yourself with all of them. Just fill in your details here if you need help with reducing your tax bill and or wish to discuss some other matters.
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