Known and lesser-known ways to save on tax

The unexpected uptick in government borrowing in July has further fuelled speculation of tax rises to plug the £22 billion black hole in public finances.

The chancellor has already warned of difficult decisions ahead of the Budget on 30 October, but what they mean for taxpayers remains to be seen.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “It is becoming increasingly clear that a bitter cocktail of tax rises and public spending cuts will be the order of the day at the next fiscal event in October to get the nation’s finances back on an even keel. With tax rises seemingly on the horizon, effective tax planning has never been more crucial. Now is the time to evaluate and take steps to bolster your tax position and make the most of the allowances available to you.”

“Maximising tax efficiency isn't just about the obvious strategies—taking advantage of both well-known and lesser-known methods can make a significant difference. From ISAs and SIPPs to lesser-used reliefs such as making regular gifts from income to reduce your IHT bill, exploring all available options is key to keeping more of your hard-earned money.”

Myron explores 10 of the known and lesser-known ways to save on tax – and how to make the most of them.

1) Inheritance Tax (IHT) planning

What is it? Giving money away while you are still alive is the most straightforward way of reducing a potential IHT bill.

Each year you can give away £3,000 tax free and make as many gifts of up to £250 to different people as you would like. There are also special allowances for weddings; you can give a child £5,000 when they marry, £2,500 to grandchildren or great grandchildren or £1,000 to anyone else.

Any lump sums you give in excess of the allowances are considered potentially exempt transfers, which means you must survive seven years before the gift becomes totally tax free.

Complex situations often require professional financial advice to navigate effectively.

Gifts from income for IHT planning

You can give away as much money as you like – without worrying about IHT – so long as payments are regular, and you can afford to make them from your normal expenditure. This can be a game-changer in estate planning.

How to claim: The gifts must form a regular pattern. This means the giving needs to be regular – whether that's monthly, quarterly, or annually. Sporadic gifts are unlikely to pass muster.

These gifts must come from your income, not from your capital. After making the gift, you should have enough income left over to maintain your usual standard of living.

These demands mean that if you want your gifts to be exempt from IHT, the onus is on you to ensure that the executors of your will have all the information they need to satisfy HMRC.

This means keeping detailed records of your income, outgoings, and the gifts themselves.

2) Using losses to reduce your gain

What is it? You might be able to reduce your capital gains tax (CGT) liability by offsetting losses against gains. This reduces your overall taxable gain. For example, if you have £10,000 in gains and £3,000 in losses, you only need to pay tax on £7,000 of gains.

How to claim: You need to report your capital gains and losses to HMRC via a self-assessment tax return if your total gains (before applying losses) exceed the annual exempt amount.

You do not have to report losses straight away - you can claim up to four years after the end of the tax year that you disposed of the asset.

It is worth considering strategically timing the sale of assets to maximize the use of losses against gains in the most tax-efficient manner.

3) Gift Aid donations

What is it? When you donate to charity, Gift Aid lets the charity reclaim 25p on every £1 donated, and higher-rate taxpayers can claim back the difference between the basic and higher rate of tax.

How to claim: Fill out a Gift Aid declaration when making your donation. Higher-rate taxpayers can then claim the additional relief through self-assessment or by contacting HMRC.

4) ISAs

What is it? ISAs are a go-to for tax-free saving or investing. You can save or invest up to £20,000 each year without paying any tax on the interest, dividends, or capital gains.

How to claim: Open an ISA through your bank or an investment provider like interactive investor. The tax advantages are automatic, so your returns remain untouched by the taxman.

5) Pension contributions

What is it? Pensions are one of the most tax-efficient ways to save, with contributions enjoying tax relief at your highest rate of income tax. The triad of investment growth, pension tax relief and the magic on compounding can significantly grow your retirement nest egg over the long term.

How to claim: Basic rate relief is added automatically by your provider, but if you’re a higher or additional rate taxpayer, you’ll need to claim the extra relief through self-assessment.

6) Salary sacrifice schemes

What are they? By giving up part of your salary in exchange for benefits like increased workplace pension contributions or cycle to work scheme, you can lower your taxable income and your tax bill.

How to claim: Speak to your employer about setting up a salary sacrifice scheme. Your payroll department will handle the adjustments to your salary and tax.

7) Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

What are they? They are government-backed initiatives designed to encourage investment in smaller, high-risk companies by offering significant tax incentives to investors. For those willing to take on more risk, investing in VCTs or EISs offers substantial tax benefits, including 30% income tax relief and exemptions on capital gains.

How to claim: Invest through a VCT or EIS provider. Tax relief is claimed through your self-assessment, supported by certificates from the investment.

8) Trading Allowance

What is it? Introduced in April 2017, it allows individuals to earn up to £1,000 per tax year from property or trading income without needing to declare it to HMRC or pay tax on it. It is designed to simplify the tax obligations for individuals with small amounts of trading or miscellaneous income.

How to claim: If your trading or property income is less than £1,000 in a tax year, you don’t need to declare this income to HMRC, and no tax is due.

If your income exceeds £1,000, you’re required to register for self-assessment. You can either deduct the allowance from your total income to arrive at the taxable amount or calculate your profits in the usual way (income minus allowable expenses) and pay tax on the lower amount.

9) Marriage Allowance

What is it? If you’re married or in a civil partnership, if one partner is a 20% taxpayer and the other earns less than the personal allowance (£12,570), you can transfer 10% of that allowance (£1,260) to the higher earner. It’s a quick and easy way to save up to £252 a year.

How to claim: You can apply through the HMRC Marriage Allowance page. Once approved, the savings will be adjusted through your tax code or via your self-assessment.

10) Blind Person’s Allowance

What is it? Blind Person's Allowance is an extra amount you can earn before paying tax. If you’re registered blind, you’re entitled to an additional allowance of £3,070 for the 2024/25 tax year, which can be transferred to your spouse if you can’t use it all.

How to claim: Apply through HMRC, providing evidence of your visual impairment. Once granted, it’s automatically factored into your tax code.