Here’s how you can keep more of what you earn without breaking any rules
The new tax year is here. Okay, that may have passed you by because it’s not so much fireworks and auld lang syne - it’s more tax returns and new ISA allowances, but it’s still important.
Because a new tax year is the perfect chance to check out your tax affairs and make sure that you’re keeping as much of your money as possible.
That doesn’t mean hiding your cash in some tax dodge that’s popular with b-list celebs, it means making the most of the tax breaks the government deliberately offers.
But if you don’t know about them then you can’t use them. So if you want to pay less tax in 2018/19 then here are 10 ways to keep more of your money.
1) Use your ISA allowance
Yes, okay so we were obviously going to list this one first! But using an ISA means you can shelter your savings and investments from the tax collectors, and your annual allowance is £20,000.
That can be saved as cash into a tax-free ISA savings account or as investments into a stocks and shares ISA.
In the last couple of years the government launched Innovative Finance ISAs (IF ISA), allowing people to invest their money into peer-to-peer lending and keep any returns safely protected from the tax officers.
Yes, it’s riskier than cash savings because there’s no government protection for your money, but the expected returns are considerably higher.
For example, easyMoney currently offers two different IF ISA products, one with a target annual return of 4.05%, one with a target return of 7.28%.
That’s a return you definitely want to keep all of.
2) Tax-free childcare
If you’re a parent then the chances are you pay a small fortune in childcare. When they’re tiny the cost of nursery can often be more than the mortgage and even once they’re in school the price of after-school clubs for working parents can be painful.
For a long time employees could use childcare vouchers to pay for that childcare out of their pre-tax income. But for the growing army of freelancers working in the gig economy the government has finally launched tax-free childcare, available to everyone, where the state simply tops up your payments with 20% of the tax you’ve already paid on that money.
You can get up to £2,000 a year per child, depending on your childcare bill, so this is a serious way to pay less tax.
3) Salary sacrifice
Did you know that the government lets you give up a portion of your salary and spend it on certain things before you pay tax and National Insurance?
Salary sacrifice can be used for pensions and childcare vouchers, which we’ve covered in a bit more depth, but it can also be used for things like a bike to ride to work, a company car and work-related training.
It’s worth seeing if your employer offers any of these schemes because they could save you some serious money.
4) Use your marriage allowance
Every adult in the country has a personal tax-free allowance each tax year, meaning they can earn up to that amount without paying the tax office anything.
For the new tax year 2018/19 it’s £11,850 – earn less than that and you won’t pay any income tax at all. if you earn more than that but your spouse doesn’t use all theirs then they can transfer £1,150 of their personal allowance to you.
That means that, as a couple, you can reduce your overall tax bill by up to £230 a year. If that doesn’t sound like a huge amount then you should consider that you’re allowed to backdate your claim to include any tax year since 5 April 2015 as long as you were married then.
That could mean more than £800 including the 2018/19 tax year. That’s definitely worth having. Sadly, this tax break is only available to couples who are married or in a civil partnership.
5) Top up your pension
Unless you earn more than £150,000, you get full tax relief on pension contributions of up to £40,000 (as long as it’s not more than 100% of your annual income).
That means that you get 20% added to your pot by the government automatically and if you pay a higher rate of tax you can claim the extra too, although when you earn £150,000 a year your tax-free allowance starts to fall.
6) Take in a lodger
There’s also a way to earn a bit of cash tax free. If you have a spare room and you’re willing to rent it out to a paying lodger than you can make an extra income and the tax office can’t touch it.
Under the Rent A Room scheme you can let a furnished room in your home to a lodger and earn up to £7,500 a year (£3,750 if you’re letting jointly) without paying a penny in tax. If you’re earning under the threshold then you don’t even need to start filling out a tax return unless you already have to do so.
You don’t even have to be a homeowner to get this perk; if you can get permission to let out a room in your rented home then you can get this tax break too.
Just don’t forget to tell your home insurance provider because it might affect your policy.