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How to reduce your personal tax bill

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How to reduce your personal tax bill

One of the things that’s guaranteed in life is tax. We all have to pay it But there are ways you can reduce your personal tax bill and make your hard-earned cash work harder. They’re all perfectly legal, of course, and HMRC actively encourages most, if not all, of them.

Start with your pension

Any contributions you make into your pension pot on top of any employer contributions will be eligible for tax relief. That means you get a ‘tax refund’ on these contributions from the government. How much you’ll get depends on what tax bracket you’re in, and you can only claim for this up to £40,000 or your annual income (whichever is the smallest) per year. Once you come to take your pension, you can take up to 25% as a tax-free lump sum too, so it’s a win-win situation.

Use your full ISA allowance

An Individual Savings Account (ISA) is a good way to save as you can put up to £20,000 in one (or spread across several different types) tax free in a tax year. There are several types of ISAs you can invest in, including cash only, stocks-and-shares, or a mix of the two. Some have fixed rates while others are variable. As well as being tax free, most ISAs will let you withdraw money without any penalties if you need to, which might be useful.

If you have some spare cash to save, it could be worth sticking it in an ISA and using as much of your £20,000 allowance as you can. Other investment types are available, but the tax benefits are often not as good, or only suitable if you’re a high rate taxpayer, for example.

Take advantage of other schemes

You might be able to get further tax savings through your benefits package. Childcare vouchers and cycle-to-work schemes are two examples, but there are lots more. Again, they work by you sacrificing part of your salary in exchange for these tax-free benefits.

Been working from home? You could get a tax rebate

2020 has been the year of home working, so if you’re one of the thousands that’s worked from home for even one day, you could be eligible for a tax rebate of up to £6 per week

You can check your eligibility on HMRC’s new microservice here. If you normally complete a self-assessment tax return, you can’t use this service and will have to claim as part of your return.

Look at inheritance tax too

Although this doesn’t directly affect you as it’ll be your loved ones who benefit, it’s worth getting your estate sorted now, and minimising your inheritance tax. The current rate is 40% on anything in your estate above £325,000. This includes property you own, any bank accounts, pensions and investments, plus jewellery, furniture, and cars.

There are things you can do to minimise how much you’ll pay, like passing homes to spouses or children. It all depends on your tax situation though, so always get advice before doing anything.

Paul Jenkins

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