Before I get into the details of tax avoidance, I just want to clear up the difference:
Tax Avoidance– totally legal schemes, encouraged and supported by the UK Government to avoid paying taxes. These are entirely legal- written into legislation, and will never get you into trouble
Tax Evasion– these are “shady” schemes at best, that involve you doing things like investing in dodgy “film making” schemes, or other types of loans that incur losses that can be offset. These are usually illegal- but can be presented as legal by the people/accountants that sell them to you. I will NOT be talking about using any of these schemes, and seriously suggest that you don’t either.
Just another note about Tax- I totally agree that we (as a society) need to pay it to ensure access/availability of services, especially to people that cannot otherwise afford it. You only have to compare our National Health Service (NHS) to other countries such as America to realise how lucky we are to have this “for free” (at point of use, with no insurance required). Now, of course, services like this have to be paid for- and that’s done using taxes. Without taxes we wouldn’t have not just hospitals/doctors, but no roads & other transport infrastructure like trains, schools- and well, basically a functioning society.
I guess, what I’m trying to say, is that I feel that taxes are required, and I really don’t mind paying them. Well, the ones that I have to pay at least!. We have (I think) a great PAYE (Pay as You Earn) system in the UK, so as long as you are employed, you pay these taxes as you earn money. No big bills from the taxman at the end of the year (unless you are self employed etc), and I think this works pretty well for most people.
What that doesn’t mean however, is that you should willingly hand over more money to the tax man that you really need to. So what methods/tools can you use to reduce your tax? Read on!
Table of Contents
Everybody* gets a personal allowance, currently £12,570 before you have to pay any tax. If you are PAYE, then this is dealt with by your tax code automatically. If you are already FIRE’d, then a small amount of consulting/freelance- or other income, can fill this allowance without paying any tax at all.
*Not quite everybody, as high earners (£100k+) start to lose this allowance (though, you might be able to retain it if you use pension contributions, see below)
I’ve written before how a Pension will be the best investment you will ever make, and it really is from a tax avoidance point of view. Literally every penny you put into your pension has the tax that you would have paid given back to you straight into your pension to grow for years and years. Let alone the fact that by law your employer has to match some of this as well- means you can usually almost double the amount you put in.
Don’t forget that you can put way more into your pension than the employee/employer minimums as well- pension tax relief is at least income, and up to £40,000 a year (there are some exceptions).
ISAs are an absolutely great tool for investing your money within. I’ve written about these before here. With a massive £20k yearly allowance to use- over a very short time frame, huge amounts can be put into investments that are free from tax- forever! You only have to put some amounts away every month/year and let compound interest take effect to see huge savings enabling F.I.R.E!
Plug in your figures here to see how quickly this can make a huge difference. With £10k in an ISA yearly, with a 6% growth for 10 years:
That full £51,045 would be entirely tax free as well- unlike earning income that would be charged at least 20% tax (and NI on top of that potentially as well).
The main capital gain that everybody uses- is the “Private Residence Relief”- which basically means, if you sell the house that you live in, you do not have to pay any capital gains!. This can be a huge gain in value terms, as houses continue (so far) to go up in value, and you don’t have to pay any tax on this increase at all. You can see now, why it can be worth buying a smaller house and extending it (or otherwise increasing its value) and then selling it- all those gains are entirely tax free.
The other Capital Gains allowance is a massive £12,300 every single year (per person). There are quite a few assets that can form part of these allowance- thought the main one is shares (that are not part of your ISA allowance above). You can use this allowance to “bed and ISA” as well to combine these 2 tax free allowances.
The name of this allowance is really a misnomer- it’s nothing about trading like shares/stocks, it’s about self employment. For most people- you get a £1,000 “trading allowance” which means you can do a few self employment jobs without even filling in a Self Assessment!. Really useful if you have a 2nd job/role that you can perform on a consulting/freelance basis.
Rent a Room Scheme
If you have a spare room in your house, then you can rent it out under this scheme, and the first £7,500 is entirely tax free. There are a few rules that you have to follow- but as long as you live there and its furnished, you can use this tax relief. What’s even better is that its automatic, and if you don’t go over this allowance then you don’t even have to fill in a Self Assessment! You can also let out as much of your house as well- so 2/3/4 bedrooms, it doesn’t matter.
Do note that you will need to:
Tell your insurance company to ensure you are still covered if you need to make a claim
Tell your mortgage company to ensure they are happy that you are doing this
Tell your council and pay the higher rate of council tax if you were receiving the single person discount
There are many many schemes to reduce tax- if I’ve missed one you think I should include, please comment below & I’ll add it. I hope that helped somebody 🙂