How To Reduce Your Tax Bill -Our Guide
Let’s be honest. Tax is the bane of all of our lives. Although a necessary evil, we all lament when April comes around. But what if I told you there was a way to around it? Don’t worry, it’s all legal. In fact, the government even incentivise it. From starting a business to simply investing your money, we list a few straightforward(ish) ways to lower your yearly tax bill.
Start a business (or a side hustle)
According to the government website, a tax exemption of up to £1,000 is permittable to individuals with a trading income or in self-employment. This is called a Trading Allowance. This can include income from side hustles, such as selling items on eBay or Depop to painting interiors or gardening. Even freelance services.
I’m sure we’ve all heard of Airbnb by now and other property rental schemes alike. Well, if you opt for this option, you can also claim £1,000 from Property Allowance. This covers renting out your room or property for a week or so. Or renting out your back garden for an event – assuming that you’re following the COVID-safe guidelines! Furthermore, if you are benefitting from both types of incomes, you’ll be entitled to a £1,000 allowance on each.
For those with an entrepreneurial spirit, starting a business is the perfect way to earn tax relief. This can spawn from a side hustle that’s outgrown your day job or a gap in the market that you’ve been able to exploit. Once your business becomes registered as a limited company, various expenses can be claimed for tax relief. This includes accountancy fees, accommodation costs or expenses while travelling (for business), marketing expenses, financial charges including an overdraft or credit card, employee expenses, equipment costs and more.
While there are loopholes and room to push the boat out a little bit, it’s best to only spend and claim on things that are on HMRC’s approved list. Notwithstanding, you’re legally obliged to keep records of these expenditures for at least six years.
Take out a loan against your assets
In most cases, you don’t have to pay income tax on a personal loan; if it’s repaid in full. As a result, there are various options to choose from to benefit from this loophole. For example, a secured loan is when you borrow money against an asset that you own. These assets can include property, vehicles or cryptocurrency. Consequently, the lender will gain a greater sense of security in case you’re unable to pay the loan back; hence the name.
This method for borrowing money is commonly used to attain large sums of money. Think £10,000 upwards. Since the risk is mostly offset to the borrower, cheaper interest rates are available, which can be beneficial if you decide to substitute this personal loan for a salary to lower your tax bill. It is worth mentioning; however, that if a personal loan comes from a friend or family member, this can become complicated. For example, if the loan has no interest or is below the Bank of England base rate, then this can be interpreted by HMRC as a gift.
Yes, you read that correctly. The wedding bells are coming! But that’s if you’d like to benefit from a Marriage Tax allowance. If you’re in a marriage or civil partnership then this will allow you to transfer £1,260 of your personal allowance to your other half, if they earn more than you. This will lower the higher earner’s tax bill for the year. As always, there is a catch. One of you needs to be a non-taxpayer, which means that you’ll earn less than the £12,750 personal allowance within a tax year. Furthermore, the other partner must be a taxpayer at the basic rate of 20%. This means that this person will need to be earning less than £50,270 per annum or £43,662 if living in Scotland. Still, this can save you up to £252 a year. Don’t worry if you’re only just hearing about this, it’s not too late! Claims can be backdated for up to four tax years if you’re eligible. Note: You must be living together to claim this benefit.
Make an investment
While investing your money is a sure-fire way to make your money work for you, it can also reduce your tax bill in multiple ways. One way is through the Capital Gains Tax allowance. Similar to Income Tax, you have a personal allowance of £12,300 on the profit that you earn from investments and £6,150 for trusts. And it gets even better. If the assets are owned jointly with another person, then your allowances are doubled. Unfortunately, if you’re unable to use your Capital Gains Tax allowance within a tax year, you’ll be unable to carry it forward to the next. Apart from that, it’s pretty straightforward!
Another way you can benefit from investing your money is through a Dividend Allowance. A dividend is the distribution of the company’s earnings to its shareholders. For example, if you own shares in Apple, at the end of the financial year, some of their earnings could find their way to you. Fortunately, you won’t have to pay tax on the first £5,000 of these earnings even though it’s technically income.
For those who don’t necessarily have the heart to invest their money, then you can still benefit from a Personal Savings Allowance. If you have a savings account, then you already know that you’re able to generate interest from your savings. This means that you earn money by having the money sit in your bank account. How easy is that? For basic-rate taxpayers of 20%, you’re entitled to up to £1,000 tax-free on the interest you earn from savings within a tax year. Those on a higher rate of 40%, then you’re entitled up to £500.
We will love to know whether you decide to implement these into your financial habits. If so, drop a line in the comment section below.