Seven ways to legally cut your tax bill as self-assessment deadline looms
Millions have yet to submit their tax return, and with the deadline just around the corner as Brits struggle with the cost-of-living crisis, there are ways to legally cut your tax bill and use your self-assessment to claw back cash from the tax man.
Reena Sewraz, Which? Money expert, said: “There are lots of ways to reduce your tax bill legally, whether you’re an employee or self-employed, a landlord, investor or pensioner. Simple checks can boost your take-home earnings with minimal effort.
“It is always worth doing a quick check to make sure you’re on the right tax code – if this is incorrect you could be eligible for reduced tax or a refund from HMRC. You can also easily check if you’re eligible to claim additional tax reliefs and allowances from the government.”
Here are seven tips from Which? to help you get started…
1) Make the most of reliefs, expenses and allowances
Take full advantage of tax reliefs, expenses and allowances that might be available – as they can significantly reduce your bill. For example, self-employed workers can deduct legitimate business expenses from their taxable income, including travel, uniforms, office running costs, and the cost of business premises – including energy bills.
Higher rate or additional rate taxpayers who have made Gift Aid declarations when giving to charity can claim back the difference between the basic tax rate and the rate you pay.
Tax relief is also available on pension contributions. For workers who contribute to a workplace pension, the employer may apply full tax relief for the tax rate you pay before you get your pay cheque.
If the employer uses a ‘relief at source’ approach, or if you have a personal pension, you will only receive basic rate tax relief. This means higher and additional rate taxpayers need to claim the difference (20% or 25%) via tax return. An added bonus is that you can backdate a pension tax relief claim by up to four tax years.
If you’ve made money from selling shares or an investment property, you’ll need to pay Capital Gains Tax. The annual exempt allowance before it’s payable stands at £12,300 for 2021/22. You can also offset losses from the same or a previous tax year to reduce your bill. Just register the losses on your self-assessment form.
2) Claim tax relief when working from home
If you work from home for all or part of the week, you might be able to claim tax relief on additional household costs you incur, such as energy bills. Tax relief rules were relaxed during the Covid-19 pandemic when most workers were told to work from home.
If you haven’t claimed tax relief from working from home during the 2020/21 or 2021/22 tax years, you should still be able to claim back £60 per year if you’re a basic rate taxpayer, or £125 per year if you pay higher rate tax.
However, for 2022/23, the rules have reverted, meaning fewer people will be eligible to claim. You can still claim tax relief if your job requires you to work from home, but not if you’re opting to work from home.
You can claim a flat rate of tax relief on £6 a week, or the exact amount of extra costs you’ve incurred – but you’ll need evidence such as receipts, bills, or contracts.
3) Reclaim overpaid taxes
If your income has unexpectedly fallen during the year, or if you pay tax by payments on account and you’ve been taxed more than you should have been, use HMRC’s online guide to reclaim any overpaid tax.
The problem arises as HMRC assumes your personal allowance is equally used each month, and bases payments on account on your previous year’s earnings.
4) Claim unused allowances by amending previous tax returns
The deadline for making changes to a 2020/21 tax return is 31 January 2023, so if there are any allowances you need to take advantage of from the last financial year, there is still a bit of wiggle room. Once a 2021/22 form is filed you can amend it anytime from 72 hours after you’ve filed it until January 31, 2024.
If you want to update a tax return for the 2019/20 tax year or earlier, you can write to HMRC explaining which tax year you are correcting and why. Depending on what you report, you may receive a rebate, but be aware that you might also have to pay more tax.
5) Pay your tax bill on time
Around 12 million people are expected to submit a self-assessment tax return this year. Missing the deadline can be costly with an automatic £100 penalty, even for those who don’t owe any tax.
The deadline for paying the bill is also the same as filing, so if you miss it you’ll be charged interest at 6% from the date the payment was due.
6) Save on your tax bill
If you’re a Pay As You Earn (PAYE) worker, check if you’re on the correct tax code. Those on the incorrect code may be able to pay less tax in the coming months, or receive a rebate from HMRC for previous overpayments.
Instances where you could be on the wrong tax code, or an emergency tax code, include if you’ve started a new job and your new employer doesn’t have a P45; if you’ve recently had a change in salary; or if you’ve started or stopped taxable state benefits.
As an 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 so it really pays to check.
7) Use the Which? tax calculator
You can use the Which? tax calculator to help you with your tax return, with suggestions for allowances you might have missed. You can even use the tool to file your return directly to HMRC.