15 unusual but legitimate ways to cut a tax bill

August 2021

While the idea of taxes may fill you with dread, you may be surprised to learn there are hundreds of legitimate ways the government lets you reduce the amount you pay. Ask any financial planner or accountant, and they will tell you there is a long list of tax avoidance tools they can use to reduce your exposure to any liability.

Tax avoidance, by the way, is totally legal and should not be confused with tax evasion, which could end up with you facing serious criminal charges. Tax avoidance is the legitimate practice of limiting the tax you pay while tax evasion is using misinformation to dodge your tax liability.

With so many tax breaks at hand, you won’t be surprised to learn there are plenty of little known and obscure ones that are often not used when they could be. Read on to discover 15 of the more unusual and lesser-known tax breaks that could help reduce a tax liability.

1. Take a commuter travel loan from your employer

If your company offers a tax-free loan to buy a season travel ticket, this could save hundreds of pounds every year as you will not be paying tax on the money used to buy your ticket. In addition, as you’re buying a season ticket, the average cost of your journey should also reduce.

2. Rent a room out

If you rent out a room in your home out, you may receive up to £7,500 a year in rent tax free. Certain rules have to be met, such as your home being fully furnished and you will need to live in the property as well.

3. Give a wedding gift

One of the more unusual ways you could help reduce an Inheritance Tax (IHT) liability is by making a wedding gift. Rules apply though, which means different amounts can be given to children, grandchildren or anyone else, and the gift has to be made before the wedding. The amounts are:

  • £5,000 to your children
  • £2,500 to your grandchildren
  • £1,000 to anyone else.

4. Give a regular gift to reduce IHT

Another lesser-known way of reducing potential exposure to IHT is by making gifts from surplus income. The gifts must be regular (whether that’s monthly, quarterly or annually), they must come from income not capital, and must not lower your standard of living. The gift can be for any amount.

5. Books could also reduce an IHT liability

One of the stranger IHT exemptions are books. While this does not mean you should invest all your wealth into literature, if you do have particularly rare and expensive books you can pass them on to loved ones without their value falling liable to IHT, which is typically charged at 40%.

6. Starting rate for savings

If you earn interest on savings you receive a personal savings allowance of £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers do not have an allowance.

In addition to this, there is the lesser-known Starting Rate for Savings, which is available to people earning less than £12,570 (2021/22) a year. It provides an additional £5,000 allowance before Income Tax is paid on savings, which may be useful if you have a child earning less than £12,570 but also has an income from savings.

7. Invest in an Enterprise Initiative Scheme (EIS)

In a bid to encourage investments into fledgling businesses, the government offers tax incentives, including the ability to deduct 30% of your investment from your annual tax bill.

As you can invest up to £1 million, this means you could deduct up to £300,000, significantly reducing a tax liability. Always speak with your financial planner to ensure an EIS is right for you.

8. Invest in a Venture Capital Trust (VCT)

Similar to the EIS, investing in a VCT also offers a 30% tax relief on investments, which can be up to £200,000. As with the EIS, always speak to your financial planner to make sure a VCT is appropriate to your risk profile, and you fully understand the risks.

9. If you lived in a house you now rent out, claim PRR

If you own property as a buy-to-let, you will typically be liable for higher rates of Capital Gains Tax (CGT) when you come to sell it.

Depending on your earnings, your CGT rate could be 18% or 28%. Yet a lesser-known rule is Private Residence Relief (PRR), which means that if you used the property as your main residence, you could reduce the CGT owed.

10. Don't pay National Insurance if you’re over 65

Another little-known tax rule is that if you’re over the age of 65 and still working, you do not need to pay National Insurance contributions (NICs) on your earnings. If you haven’t already, tell your employer so that they can adjust the amount you receive in your pay packet.

11. Claim additional tax relief if you’re a part-time business owner

If you are a part-time entrepreneur with a small business, you may be able to benefit from the Trading Allowance. This means that if your income is £1,000 or less it could be exempt from Income Tax regardless of whether you have other employment or not.

12. Claim tax relief for charity donations

When you make a donation to a charity through Gift Aid, the charity or sports organisation you’ve donated to can claim basic-rate tax relief on your donation.

If you are a higher- or additional-rate taxpayer, you can also claim the difference as additional tax relief.

13. Wine is not subject to Capital Gains Tax

If you sell a particularly expensive bottle of wine, you will typically not be liable to any CGT on the profit you make. Depending on your earnings, in 2021/22 CGT is typically charged at 10% or 20% on the amount above the annual exempt amount, the latter being £12,300.

14. Get an energy saving product

While it’s easy to forget, VAT is a tax. Some items receive more generous VAT rates, such as some energy products including controls for central heating, solar panels and specific “green” heating systems. These are charged at 5%, not the usual 20%, meaning installing an environmentally friendly heating could save you tax while you help save the planet.

15. Gold could be free of CGT

While any profit made from selling gold bullion is subject to CGT, this is not typically the case if it is bought as coins. This is because coins are regarded as British legal currency and, as such, not liable to the tax. Please remember gold is an investment, so always speak to your financial planner to ensure investing in it is right for you.

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We are always here for you, so if you want to discuss your pension, the issues around lifestyling or tax implications of any income you’re thinking of taking, please contact us below.

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