Introduction

Every little count more than ever especially with all that is presently happening with the cost of living crisis. Maximising income is as important if not more than just keeping costs low. One of the things I learned from reading the millionaire next door was that rich people minimise their tax bills. Controversial as this may be, it is in fact what they do.

It’s easier for companies to manage taxes than it is for individuals. The tax man has direct access to your income especially if you are a PAYE taxpayer.

Here is the good news! There are still ways to maximise your income and reduce your tax burden as a ‘pay as your earn’ taxpayer. So I have put together 7 ways in which I manage my tax bill.

How does PAYE tax work in the UK?

If you are confused by what PAYE means, it is an acronym for Pay As You Earn (PAYE). If your tax is deducted at source by your employer from your earnings, then you are a PAYE taxpayer. Since your PAYE tax is deducted at source, you might think there is little you can do to minimise it. However, there are still things you can do to reduce your tax bill.

7 ways to reduce your UK PAYE tax bill

Understand your tax code

Do you understand your tax code? Are you paying the right amount of tax? This should be your first step to ensuring you are paying the right amount of tax. If unsure how the net pay you receive is calculated, do the following;

• Have someone in your payroll team explain your payslip and how everything is worked out. You should know your personal allowance and your rate of tax
• Estimate your tax and compare it to the tax on your pay slip- You can use this HMRC tool to do so
• Keep an eye out for any changes to your bill or tax code. Your payroll or HMRC staff can make mistakes. I recently had my tax code changed and couldn’t understand why. Someone had wrongly assumed I had two jobs even though a P45 was clearly issued for the one I had left and it was obvious the company had not paid me for months. So I had to call HMRC to resolve it and still annoyed I didn’t get an explanation or an apology.

Pension

Planning for retirement is a key element of taking control of your personal finances. The government have put some things in place to encourage it. Paying into a pension is one of the most effective ways to manage taxes so If you don’t pay into a pension yet, consider it. Employers in the UK have to match employee pensions by a minimum of 3%. So not paying into a pension means you are leaving money at the table by not taking advantage of your employer contribution.

In addition to that, you gain tax relief on the amount you contribute to your pension. If the amount you contribute is taken out of your pay before income tax is calculated, you get the relief at source. This can be gotten for personal, workplace and stakeholder pensions.

Childcare

If you have children under 12 are you taking advantage of all your tax deductibles? There are 2 schemes currently available, the childcare voucher scheme and the tax-free childcare scheme.

You can only get childcare vouchers if you already joined a scheme on or before 4 October 2018. Given the date of this post, if you are not in a scheme already then it is likely you can’t join one. If you are currently getting childcare vouchers, it is worth checking if you will be better off in the new Tax-Free childcare scheme by using this childcare calculator.

The tax-free childcare scheme gives you £2 for every £8 you pay into a childcare account, whilst this is not a tax relief on your PAYE tax, it is worth considering whether you are better off in the scheme or joining the scheme if you are new to tax-free childcare and can no longer join a childcare voucher scheme.

Tax relief on donations to Charity

Are you aware that you get PAYE tax relief on your charitable giving?

Check if your employer runs a payroll giving scheme, you can donate to a charity from your pay and get instant tax relief. The tax relief you get depends on the rate of tax you pay. For instance, if you are a basic rate taxpayer in England and you want to donate £100 to a charity, you only pay £80 as the £20 will come from the 20% tax relief.

You can also claim tax relief when you donate land, property or shares to a qualifying charity. More details on this are here.

Salary sacrifice

Does your company run a salary sacrifice scheme? Salary sacrifice is when an employee gives up part of their salary in return for non-cash benefits. Invariably the amount you are sacrificing will be taken out of your salary before any tax is calculated. Your employer will save on employer NI so it benefits them too.

More recently, most benefit in kind does not qualify for tax benefits under the salary sacrifice schemes. However, payment into a pension scheme, childcare vouchers, and use of workplace nurseries will qualify for salary sacrifice arrangements.

An important thing to note is- The amount you pay into a salary sacrifice scheme will in effect reduce your salary. This could affect how earnings related benefits are calculated. For example whether you qualify for some statutory payments such as statutory maternity pay.

Job expenses

Did you know you can claim tax relief on some work expenses? One of such expenses I have claimed tax relief on in the past is professional fees and memberships. A check on the HMRC websites shows that you can actually claim tax relief on a few things which I will list in Part 2 of this post.

You can claim tax relief on your Pay as you earn tax on professional fees and membership subscriptions if they are required for your job. I use to claim this on my membership fees to my accounting body because my job required me to be a qualified accountant. After applying for relief, my personal allowance was adjusted. So I had a higher personal allowance (12570+ annual membership fee). My current employer pays for this so I can no longer claim this relief and have asked HMRC to adjust my tax code.

The great thing about this one is that you can claim in arrears for previous years if this is your first claim. Remember, you can only claim if the fee or subscription is required for your job, your employer has not paid for it and you are a member of one of the organisation on HMRC’s list of approved bodies. Check if you can claim and how to claim here.

Marriage allowance

There is currently 2 married people’s allowance. The longest-standing allowance, the married couple allowance requires one of the couples to be born before 6 April 1935.

The more recent marriage allowance allows you to transfer £1,260 of your personal allowance to your partner, If you have a partner who earns less than the personal allowance, currently at £12570, the unused balance of their personal allowance can be transferred to their partner up to £1260.

There are conditions of course, as always. You have to be married or in a civil partnership, the partner the allowance is being transferred to needs to be a basic rate taxpayer and the transferee should have earned less than £12570 or the current personal allowance.

A piece of good news! this can also be backdated and claimed in arrears (from 5 April 2018) so if you took time off to care for children and had little or no income anytime from 2018, check this out and see if you can claim even if your income has now increased.

Click here for more information about eligibility and how to claim the marriage allowance.

Take action!

This is a checklist for you to make sure that you are maximising your income and minimising your tax bill. A lot of people pay little attention to their PAYE tax and just resign to the constraints of a paycheck and focus on the net amount they receive in their bank account.

Don’t ignore this post, check that you fully understand your payslip, and enrol in a pension if you haven’t. Pensions provide a double whammy of additional contributions by your employer and tax savings plus you are saving for retirement.

Check you are taking advantage of childcare vouchers or enrol in the tax-free childcare scheme. If you are paying into a pension and receiving childcare vouchers, check they are through a self-sacrifice arrangement with the warnings. If you make regular donations to charity, check whether your employer has payroll giving. If you are struggling a bit and don’t want to stop your contributions, doing it via payroll giving means it will cost less.

Some of the suggestions above are useful if you are edging towards the threshold for the higher rate of tax. Making some small changes will save you from paying additional income tax. Let me know if you found any of the tips useful or have questions in the comment box below.