5 simple ways to reduce your Income Tax bill

As the cost of living continues to rise, you might already be searching for ways to save money for the year ahead. According to the Telegraph, the average UK worker would need an 8.7% pay rise in 2022 in order to match the effects of inflation and the rising cost of living.

While your 8.7% pay rise might not be on the cards just now, there are ways you could maximise your current earnings by reducing your Income Tax bill as much as possible.

If you are making plans to get more out of your finances this year, read on to find out five simple ways to reduce your Income Tax bill.

1. Increase your pension contributions

You may already know that contributing to your pension means you benefit from generous tax relief.

You may not know, however, that between the 2016/17 and 2018/19 tax years, up to 80% of higher- and additional-rate taxpayers paid more Income Tax than necessary, because they didn’t claim the additional relief on their pension contributions through self-assessment.

These findings by PensionBee claim that 1.5 million of the UK’s highest earners missed out on approximately £2.5 billion in relief in these three tax years.

If you have not capitalised on this tax relief in recent years, there’s still a chance you could save money. You can “carry forward” your pension Annual Allowance of £40,000 – or 100% of your earnings, whichever is lowest – from the three preceding tax years. So, you could still make up for missed savings opportunities by boosting your pension contributions before 5 April.

2. Consider a salary sacrifice

“Losing” a portion of your earnings sounds like the opposite of saving money, but a salary sacrifice arrangement could make your income go further in the long term by reducing the amount of Income Tax you pay.

If your employer offers a salary sacrifice option, you can reduce your take-home earnings to an agreed-upon amount and replace the difference with pension contributions on your behalf. You can also agree a salary sacrifice in exchange for other perks, such as a company car or childcare vouchers.

This system allows both you and your employer to pay fewer National Insurance contributions (NICs) and reduces your Income Tax bill. You will only pay Income Tax on your lower salary, while the difference is used to top up your pension (or provide another benefit) with tax relief.

While this sounds like a perfect system, there are some downsides to a salary sacrifice. If you apply for a mortgage, for example, the lender might use your lower income when deciding what they will lend you. This means you could only be eligible for a smaller mortgage loan than your original salary would afford.

If you have further questions about negotiating a salary sacrifice as a means of reducing your Income Tax, contact your financial planner.

3. Make the most of your Marriage Allowance

The Marriage Allowance allows an individual to pass on up to £1,260 of their tax-free Personal Allowance – which stands at £12,570 as of February 2022 – to their spouse or civil partner, cutting their partner’s Income Tax bill by as much as £252 a year.

In order to qualify for the Marriage Allowance, one civil partner or spouse must be a basic-rate taxpayer, and the other must not have an income exceeding the Personal Allowance.

While the Marriage Allowance may only seem like a small saving, every little helps when it comes to meeting the rising cost of living. If you could reduce your Income Tax by up to £252, this sum could be put towards surging energy costs, or contributed towards a well-deserved holiday, for example.

4. Check with HMRC to see if you’ve overpaid or are entitled to a rebate

According to Which?, one in six people believe they overpaid when completing their self-assessment tax return in 2019. You could have paid more tax than you owed in recent years, meaning you may be eligible for a rebate from HMRC.

If you have been sent the incorrect tax code, for example, you could have been asked to pay more tax than you owed. Additionally, if you earn a salary through PAYE, you could still have paid too much tax if you were on an emergency tax code as a new starter, or if you stopped working halfway through the tax year.

You can ask for a tax rebate if HMRC have wrongfully overcharged you. This process could take up to 12 weeks, but you could receive hundreds or even thousands of pounds of overpaid Income Tax if your claim is accepted.

If you have questions about the tax refund process or think you may have overpaid your Income Tax, contact your financial planner today for guidance.

5. Consult a professional

If you are determined to sort through your finances and cut costs where you can, a financial planner may be the right person to have on your side. It can be frustrating if you believe you are paying too much Income Tax, without having a clear path towards righting the situation.

A financial planner can perform a comprehensive review of your circumstances and help determine whether you could reduce your Income Tax bill overall. A financial planner’s guidance could also be constructive in helping you plan for the future, so you could pay less Income Tax in the years to come.

Get in touch

If you want to meet your financial goals and need assistance, contact us today.

Email enquiries@prosserknowles.co.uk or click here to request a callback from one of our advisers.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.