Top tips for outsmarting the taxman

1. Increase your free money

Tax breaks, benefits and account perks are a few of the ways to claim free money from the Government. The biggest opportunities come through pensions, with basic-rate taxpayers receiving 20% tax relief, while higher- and additional-rate taxpayers can reclaim an extra 20% or 25% through self-assessment. This means that for a higher-rate taxpayer, every £1 in their pension only costs 60p.

If you’re eligible for a lifetime ISA, you can pay in up to £4,000 each tax year and receive a 25% Government bonus, adding up to £1,000 in free money annually. However, you need to use it carefully, as withdrawals before age 60 (unless for a first home) come with a 25% penalty.

On top of that, a stocks and shares, or cash ISA will give you a tax break on your investment growth and interest earned, as well as tax-free withdrawals. Everyone can pay in up to £20,000 a year into the accounts, but use it or lose it, as once the new tax year hits that allowance is reset.

Many people also miss out on valuable Government tax breaks or benefits. Check whether you’re eligible for things like marriage allowance, child benefit, free childcare hours, tax-free childcare or other benefits, as it could lead to significant savings.

2. Fill up your ISAs

Every UK resident or Crown employee has a £20,000 ISA allowance each tax year, offering a valuable way to protect your savings and investments from capital gains, dividend and income taxes. Those who qualify for a lifetime ISA should consider using up the £4,000 of this allowance before the deadline to secure their Government bonus. And remember, ISA allowances don’t roll over, so any unused portion is lost at the end of the tax year.

3. Preserve your cash

The Government estimates 2.1 million people are expected to pay tax on their cash savings this year, due to higher interest rates and frozen tax bands. The personal savings allowance means basic-rate taxpayers can only earn up to £1,000 in interest before paying tax, while higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers receive no exemption. These rates have been frozen since 2016, but interest rates have risen and more people have been pushed into the next tax bracket.

For those nearing or exceeding their allowance, using a cash ISA can be a simple way to protect interest from tax. In recent years, many savers avoided cash ISAs due to low interest rates, but they are often now a more attractive option. Couples can also consider shifting savings between partners if one sits in a lower income tax rate band or has unused ISA allowance.

4. Make capital gains tax savings

Capital gains tax (CGT) allowance has been cut in recent years – standing at £12,300 until April 2023, it’s now only £3,000. So, in order to avoid triggering an unnecessary tax bill, it is important to consider how you realise gains. If you hold investments outside an ISA or pension, selling holdings up to the current CGT allowance before the tax year end could help reduce future tax bills. Investors can also use a strategy known as "Bed and ISA" to sell investments, transfer the proceeds into an ISA, and repurchase them, meaning that future gains are protected from tax.

5. Avoid tax nibbling at your dividends

In the past two years the tax-free dividend allowance has dropped from £2,000 to £500. As a result of this change, HMRC forecasts that just under 3.6 million people will pay tax on their dividends this tax year, almost double the number who paid three years ago.

Dividend tax is only applied to income-generating investments that aren’t in an ISA or pension, at 8.75% for basic-rate taxpayers, 33.75% for higher rate taxpayers or 39.35% for additional-rate taxpayers. If you are in this situation and have some of your ISA allowance remaining this tax year, you could use a Bed and ISA to move the dividend-paying investments into your ISA and protect them from future tax charges.

6. Spot the tax traps

Frozen tax thresholds mean that more people are being pushed into higher tax brackets or are losing valuable benefits. If you have received a pay rise in the past year, you should check whether you’ve moved into a higher tax band, as this could mean you are no longer eligible for benefits, such as the marriage allowance, child benefit or tax-free childcare.

For example, child benefit begins to taper once income exceeds £60,000 and disappears entirely at £80,000. Those earning above £100,000 lose access to tax-free childcare and free childcare hours, and if you start to earn over the personal allowance you’ll also lose the marriage allowance. On top of that, if you move into the higher-rate tax bracket you’ll see your personal savings allowance cut in half and you’ll pay a higher dividend tax rate. If you’re only slightly above a threshold, you could make a small pension contribution to reduce your taxable income back down below it.

7. Tax-cutting partner work

If you are comfortable sharing money and investments with your partner, you might be able to reduce your tax bills. For example, if one partner is a lower earner, the couple could transfer savings or investments into their name and so pay a lower rate of dividend, capital gains, income and other taxes.

On top of that, if one partner hasn’t used up their personal savings allowance, ISA or pension contributions, or CGT exemption, it might be worth moving cash or investments around to take full advantage of those tax breaks.

8. Multi-generational planning

If you’re a parent or grandparent who’s been planning to save for children but never got round to it, maybe because life has got in the way, remember that you can save up to £9,000 in a Junior ISA per child each year, with the money growing tax-free until they turn 18. At that point, the Junior ISA converts into a standard ISA, and the child can access the pot.

Even putting away £500 a year can result in a decent pot after a few years, assuming its invested and earning 5% return a year after charges. After five years you’d have a pot worth £2,900, and if it was saved for the full 18 years you’d have a pot worth almost £15,000. If you are able to put away the full £9,000 Junior ISA allowance each year, earning the same 5% return a year will grow to £52,200 after five years or £266,000 after the full 18 years.

Another option for the very long-term is a Junior SIPP, which allows contributions of up to £2,880 per year, with Government tax relief topping that up to £3,600. The child won't be able to access the money until at least age 57, but it can provide a solid head start on retirement savings.

9. Reduce inheritance tax by gifting

Inheritance tax (IHT) is often called “the most hated tax”, but there are simple ways to cut how much your estate will pay. Every individual can gift up to £3,000 per year free of IHT, and if it wasn’t used in the previous year, this allowance can be carried forward. Couples can combine their allowances to give away up to £6,000 tax-free annually.

On top of that, extra allowances apply for wedding gifts, with parents able to gift £5,000 to a child, grandparents able to give £2,500 to a grandchild, and anyone else allowed to give £1,000 tax-free. Small gifts of up to £250 per person each year are also exempt.

The most generous exemption is for gifts made from regular income, which can be unlimited if they don’t reduce the donor’s standard of living. If you haven’t used up your annual gifting amounts it’s a good idea to consider it before the end of the tax year.

10. Smooth by automation

A lot of people wait until the tax year deadline to pay money into their ISA. But if you instead spread investments throughout the year, it can help smooth market volatility and reduce the risk of buying at the wrong time.

Regular investing also means you don't have to remember to make payments into the ISA. Lots of investment platforms allow automatic monthly investments starting from £25, making it easy to start small and build up your savings over time.