Seven ways to cut your tax bill - legally

We reveal seven legal ways you can save on tax, from paying more into your ISA and pension to checking your tax code is correct and gifting money

Calculator, tax bill and broken pencil on a white table
(Image credit: Getty images)

Understanding how to save on tax is particularly important as a new tax year approaches. 

From 6 April, a number of tax changes will be implemented, while any unused tax allowances will be lost. 

An income tax shake-up, as well as a reduced capital gains tax (CGT) allowance, means many people will be paying more tax at a time when budgets are already stretched. 

Fortunately, there are steps you can take to cut your tax bill and save money, without getting on the wrong side of the law.

Here’s what you need to know.

How to save on tax

Below, we’ve outlined seven legal ways you can save on tax.

1. Check your tax code is correct

Your tax code indicates how much income tax HMRC will deduct from your salary. Checking it’s correct is important so that you don’t end up paying too much tax – or even end up with an unexpected tax bill because you haven’t paid enough. 

You can find your tax code on your payslip and it’s usually made up of three of four numbers and one letter. You can find out more about what your tax code means on the website

Alice Haine, personal finance analyst at Bestinvest, says: “If your tax code appears incorrect, call HMRC and ask for it to be amended. If it is incorrect, you might receive a generous rebate in your next pay cheque.” 

2. Make the most of tax-free childcare

The tax-free childcare allowance is a government scheme to help working families with their childcare costs. You can get up to £500 every three months, up to £2,000 a year, for each of your children. This rises to £1,000 every three months, up to £4,000 a year, if a child is disabled.

You’ll need to set up an online childcare account and for every £8 you pay into the account, the government will pay in £2 to use to pay your childcare provider. To be eligible, your child needs to be aged 11 or under and you must earn less than £100,000.

You can get tax-free childcare on top of 30 hours free childcare if you qualify for both. 

3. Fill up your ISA

As well as the personal savings allowance, which lets basic rate taxpayers earn up to £1,000 of interest a year tax-free, everyone has an annual tax-free ISA allowance.  

For the 2022/23 tax year, this allowance stands at £20,000. This means you have until 5 April to maximise your allowance and pay into a cash ISA, stocks and shares ISA or a combination of the two. You cannot carry your allowance over to the new tax year. 

You won’t pay any income tax on the interest or dividends you receive from an ISA and any profits from investments are free of CGT. 

Uma Rajah, CEO and co-founder of ISA provider CapitalRise says: “Each year, you should think about reviewing your existing ISA products and if you are not happy with how they are performing, you should consider transferring your funds to another ISA provider. 

“An ‘ISA transfer in’ does not affect your current tax year’s allowance and there is also no limit on how many ISAs you transfer in, or on the value of those savings or investments.” 

4. Shelter money in a pension

The more money you pay into your pension, the less will go to the taxman, as Alice Haine explains: “Basic rate taxpayers get 20% added to their pot on each contribution, while higher rate (40%) taxpayers get a further 20% knocked off their tax bill. 

As an example, for every £100 gross contribution paid into a pension by a 40% taxpayer, the net cost will be just £60. 

“For additional rate taxpayers on the 45% tax rate, they can get an extra 25% knocked off their tax bills in addition to the 20% state top-up under the current rules, making the net cost for every £100, just £55.” 

Find out everything to know about pensions in our guide. 

5. Benefit from being married

Couples who are married or in a civil partnership can take advantage of the Marriage Allowance. This enables a lower-earning partner to transfer up to £1,260 in the current tax year to their higher-earning partner, which can reduce their tax bill by up to £252.

“The Marriage Allowance offers a valuable source of savings for couples,” says Paul Barham, partner at accountancy firm Mazars.

“To benefit, the lower earner must normally have an income below their Personal Allowance, this is £12,570 for the 2022/23 tax year. The higher earner’s income must be between £12,571 and £50,270.” 

You can backdate your claim to include any tax year since 5 April 2018 that you were eligible for Marriage Allowance.

6. Divide your assets

Another marriage benefit is that you don’t pay CGT on assets (such as a second home or shares) you’ve given or sold to your spouse or civil partner. The only exceptions are if you separated or didn’t live together at all in that tax year, or you gave your partner goods for their business to sell on. 

This means you can divide your assets to take full advantage of your CGT allowances before they get cut from £12,300 to £6,000 on 6 April.

7. Gift money to cut inheritance tax

Inheritance tax is levied against the estate of someone who has died. Everyone gets an inheritance tax allowance of £325,000 and the tax is only charged if your estate is worth more than this. Tax is charged at 40%.

One way to cut your inheritance tax bill is by gifting money. No tax is due on any gifts you give, provided you live for seven years after you’ve given them. You can give up to £3,000 of gifts each tax year. This is known as your annual exemption and you can give the full amount to one person or split it between several people. 

You can also roll over your allowance, so if you don’t use it by 5 April, you can give away cash or assets worth £6,000 next tax year. This is only possible for one tax year. 

In addition, you can give up to £5,000 towards your child’s wedding, or £2,500 for a grandchild’s. For anyone else’s wedding, you can gift up to £1,000 without worrying about inheritance tax. 

You don’t pay any tax if you gift money to your spouse or civil partner, and any money you leave to a charity will also be free of inheritance tax.

More on tax

Rachel Wait

Rachel Wait is a freelance journalist. She has been writing about personal finance and consumer affairs for over a decade, covering everything from credit cards and mortgages to pensions and insurance. She has written for a range of websites and national newspapers, including Mail on Sunday, the Observer, Forbes and the Spectator.

Rachel is keen on helping consumers understand their finances.