Breaking Financial Boundaries: Discover the 10 Game-Changing Tactics to Revolutionize Your UK Tax Planning

As we enter a new tax year in April 2024, we have worked with a UK tax advisor to summarise 10 strategies that you can explore to legally reduce your UK tax bill either in the present or in the future.

Pension contributions

A pension fund is essentially a ‘money box’ that accumulates funds that you can draw on during retirement.

Pensions provide a measure of tax relief on the way in (‘the contribution’) and are taxable on the way out (‘the withdrawal’) subject to the 25% tax free lump sum up to £1,073,100. Incomes and gains generated within the pension fund (‘the growth’) are exempt from taxation.

Broadly, you’ll receive tax relief at your highest marginal rate, and we’ve provided an example to put this into real life context:

For every £1 contribution …

– if you are a basic rate tax payer, you’ll contribute 80p
– if you are a higher rate tax payer, you’ll contribute 60p
– if you are an additional rate tax payer, you’ll contribute 55p

Employer contributions to your pension scheme are also a tax-free benefit.

You should note that your total pension input (including your employers contribution) per tax year period is restricted by the annual allowance which is currently £60,000. If you are considered a ‘high earner’, your annual allowance may be restricted to £10,000.

Individual savings accounts (ISAs)

Individual savings accounts (ISAs) are wrappers that hold cash or investments that you can draw on at any time, except for a LISA.

ISA’s do not provide a measure of tax relief on the way in (‘the contribution’) however, are tax free on the way out (‘the withdrawal’).  Incomes and gains generated within the ISA fund (‘the growth’) are exempt from taxation.

You can invest up to £20,000 per tax year into an ISA. Note that following the chancellors spring budget, the government plans to introduce a ‘British ISA’ that would permit an additional £5,000 to be invested in UK companies.

Allowances

You have access to various tax-free allowances that enables you to receive investment incomes and gains up to a certain threshold, free of UK taxation, as follows:

– bank interest allowance of £1,000 if you are basic rate tax payer or £500 if you are a higher rate tax payer; and
– dividend allowance of £500; and
– capital gains exempt amount of £3,000.

If you hold investments outside of pension and ISA wrappers, you can utilise the above allowances on an annual basis.

Spousal transfers

If you are married or in a civil partnership and your spouse or partner either earns less than you or is not utilising their wrappers or allowances, you can transfer assets to your spouse or partner, free of tax implications to enable your spouse to utilise wrappers and allowances.

To put into context, if you are a higher rate tax payer, your spouse has no income and you solely own a BTL property that generates net rental income of £10,000 pa, by transferring 100% ownership of the BTL to your spouse, you will save £4,000 of tax pa.

Marriage allowance

If you are married or in a civil partnership, you may be able to elect to receive some of your spouses personal allowance.

If you are eligible, you will be entitled to a tax reducer of up to £252 which in return, can generate a repayment of tax back to you.

Note that to be eligible you must pay tax at no more than the basic rate and your spouse or partner either earns no income or earns income below the personal allowance of £12,570.

You can apply for the marriage allowance transfer online here.

EIS investment

An Enterprise Investment Scheme (EIS) is a scheme which encourages investment in start up companies by giving income tax relief on the amount invested.

You will receive tax relief by way of a tax reducer at a flat rate of 30% up to a maximum investment of £1,000,000.

To put into context, if you made a £1,000 investment into an EIS scheme, your net investment would be £700, as you would receive £300 back from HMRC.

Note that the investment must be held for 3 years to retain 100% of the tax relief.

Self-employed expenses

If you are self-employed, you will personally incur various costs to run your business. Some of these costs will be deductible for tax purposes and thus, these costs will reduce your profits subject to taxation. You can find a summary of deductible costs here.

Alternatively, if you do not have any deductible expenses, you should claim the trading allowance of £1,000 on an annual basis against your profits.

Remittance basis

If you are considered non-domiciled, which broadly means you were born outside of the UK and do not consider the UK to be your long-term home, you may be able to use the remittance basis, which will enable you to exempt your foreign incomes and gains from UK taxation.

Note that use of the remittance basis generally results in the loss of the personal allowance (0% tax band) and requires you to keep your foreign incomes and gains offshore.

Note that the concept of non-domiciled will be abolished and replaced with the new arrival scheme that will largely benefit individuals who have recently relocated to the UK.

From the 2025/26 tax year, the new arrival scheme will enable you to exempt foreign incomes and gains from UK taxation, during your first four tax years of residence, providing that prior to moving to the UK, you’ve been non-resident for ten consecutive years.

Rent a room relief

If you are looking for tax free ways to increase your income, rent-a-room relief will enable you to receive up to £7,500 of tax-free rental income on an annual basis through renting a room out in your home.

Note that claiming rent-a-room relief will not affect the availability of private residence relief when you come to sell your home.

Premium bonds

You can hold up to £50,000 in Premium Bonds, with a minimum investment of £25. Premium Bonds do not guarantee any rate of return at all. A Premium Bond simply buys a ticket in a monthly raffle. There is a prize draw every month, and only if your Premium Bond-holder’s numbers are drawn, you will win a cash prize. The monthly prizes range from £25 to £1 million.

All prizes are tax free and you are free to encash your premium bonds at any time and have your investment returned.